Use the diagram below to answer questions 4.13 and 4.14. AS ASo Ei P, Po Eo 0 To

Question

Use the diagram below to answer questions 4.13 and 4.14. AS ASo Ei P, Po Eo 0 Total production, income 4.13. The type of inflation arising from the above diagram could be due to... [1] a decrease in tax rate 2] a decrease in imports relative to exports. [3 an increase in government spending 4] an increase in wages. 4.14. An appropriate policy to solve the inflation problem arising from the above diagram would be to... [1 increase the tax rate [2] reduce the import tariffs. [3] reduce government spending. apply the incomes policy

Explanation / Answer

4.13) The asnwer is D -) an increase in wages.

because, in the above diagram, the aggregate supply curve shifts to the left which indicating decrease in supply and thus why there is a rise in price level. when there is increase in wages, the firm production cost increases which decrease the production and aggregate supply decrease and thus shift the AS curve to the left.

4.14) The answer is D -) Apple the incomes policy.

when the income policy is applied, there is no increase or decrease in wages . thus firm can produce more of the good.

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