QUESTION 1 An increase in the price level lowers the interest rate and chokes of

Question

QUESTION 1 An increase in the price level lowers the interest rate and chokes off investment and consumption spending. An increase in the price level raises the interest rate and chokes off investment and consumption spending An increase in the price level raises the interest rate and chokes off government spending. An increase in the price level kowers the interest rate and chokes off government spending QUESTION 2 Long-run curve intersects the short-run aggregate supply curve and both curves intersect at a point on the long-run supply curve. aggregate demand equals short run aggregate supply. QUESTION 3 Why does the short-run aggregate supply curve shift to the left in the long run, following an increase in aggregate demand? Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices Workers and firms adjust their Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and prices. QUESTION 4 If the short-run aggregate supply curve GDP will be equal to potential GDP GDP will be above potential GDP. GDP will be below potential GDP aggregate demand will increase. 2

Explanation / Answer

Consider the given problem,

1.

“An increase in “P” raise “r” and chokes off “I” and “C”, describe the “interest rate effect”.

=>1(b).

2.

LR equilibrium occurs when “AD intersect SRAS and both intersect at the same point on LRAS”.

=> 2(a).

3.

“SRAS shift to the left in the LR” as the workers and the firms adjust their expectations of wages and prices upward and they push for higher wages and prices”.

=> 3(a).

4.

If the SRAS increases by less than LRAS, then at the SR equilibrium, “GDP will be below potential GDP”.

=> 4(c).

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