1) 2) Consider the figure to the right showing the long-run aggregate supply (LR
ID: 1111614 • Letter: 1
Question
1)
2)
Consider the figure to the right showing the long-run aggregate supply (LRAS) and the aggregate demand (AD) curves. LRAS Suppose that the long-run aggregate supply curve moves to a GDP level of $20 billion. Which of the following is true? O A. The equilibrium price level will decrease, and equilibrium GDP will decrease. 0 B. The equilibrium price level will increase, and equilibrium GDP will increase. ° C. The equilibrium price level will decrease, and equilibrium GDP will increase. 0 D. The equilibrium price level will increase, and equilibrium GDP will decrease. AD 10 15 20 25 30 35 40 45 50 Real GDP per Year (S trillions)Explanation / Answer
1)
Initially, equilibrium GDP is $25 trillion at a point where long-run aggregate supply curve and AD curve intersect. But when LRAS curve shifts leftward at GDP $20 trillion, then at new equilibrium point the equilibrium price will increase and real GDP will decrease.
Hence option D is the correct answer.
(2)
In the given Keynesian diagram if there is an upward shift of AE curve, from E to E', due to change in the price level.
Then it leads to increase in the real GDP and aggregate expenditure at the new equilibrium price.
Since AE can increase either increase in the consumption, I and G and NX or increase the price level of goods and services.
Since it is given that price level has changed, it means price level has decreased, it means consumption has become less expensive, as a result, people and government have increased their consumption of goods and services and it leads to upward movement along the AD curve but it has not been shown.
Hence option C is the correct answer.
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