12) Suppose firms are currently producing output at a level beyond their normal

Question

12) Suppose firms are currently producing output at a level beyond their normal capacity by using factors o production at abnormally high intensity of use. We would expect a negative aggregate demand shock to A) have no effect on the output gap. -B) increase the price level and create a small increase inrealGDP C) cause a large decrease in prices but a small reduction in real GDP D) reduce the price level but increase real GDP E) Any of the above-since the abnormally high intensity of use of factors will be raising Y".

Explanation / Answer

12. a) A negative aggregate demand shock will reduce demand in economy given supply . Thus aggregate demand curve shifts to the left .This will result in fall in price level but on change in output level .

15. A) knowledge is input which drives R&D and innovation in economy and thus improving productivity and returns to capital .

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