Other things equal, what effect will the following have on the equilibrium price
ID: 1155646 • Letter: O
Question
Other things equal, what effect will the following have on the equilibrium price level and level of real output?
a. An increase in aggregate demand in the steep portion of the aggregate supply curve
Selections to choose from:
Price level does not change, but real output increases.
Price level rises rapidly, and there is little change in real output.
Price level increases somewhat, as does real output.
Price level rises, and real output decreases.
Price level does not change, but real output declines.
b. An increase in aggregate supply, with no change in aggregate demand (assume that prices and wages are flexible upward and downward)
Selections to choose from:
Price level rises rapidly, and there is little change in real output.
Price level increases somewhat, as does real output.
Price level does not change, but real output increases.
Price level drops, and real output increases.
Price level does not change, but real output declines.
c. Equal increases in aggregate demand and aggregate supply
Selections to choose from:
Price level does not change, but real output declines.
Price level increases somewhat, as does real output.
Price level rises rapidly, and there is little change in real output.
Price level rises, and real output decreases.
Price level remains unchanged, and real output rises rapidly.
d. A reduction in aggregate demand in the relatively flat portion of the aggregate supply curve
Selections to choose from:
Price level does not change, but real output increases.
Price level does not change (much or at all), but real output declines.
Price level rises, and real output decreases.
Price level rises rapidly, and there is little change in real output.
Price level increases somewhat, as does real output.
e. An increase in aggregate demand and a decrease in aggregate supply
Selections to choose from:
Price level does not change, but real output increases.
Price level increases, but the change in real output is indeterminate.
Price level rises rapidly, and there is little change in real output.
Price level rises, and real output decreases.
Price level does not change, but real output declines.
Explanation / Answer
Solution-
a. An increase in aggregate demand in the steep portion of the aggregate supply curve Price level rises rapidly, and there is little change in real output.
The correct option is B. Price level rises rapidly, and there is little change in real output.
Reason-
Aggregate demand increases in the steep portion of the aggregate supply curve,steep portion means extra supply level when demand increases price level rises rapidly and little change in real output.
b. An increase in aggregate supply, with no change in aggregate demand (assume that prices and wages are flexible upward and downward)
The correct option is D. Price level drops, and real output increases.
Reason-
When supply increases and demand still constant then price level drops to increase sales, when price decreases automatically demand or real output increases.
c. Equal increases in aggregate demand and aggregate supply
The correct option is E. Price level remains unchanged, and real output rises rapidly.
Reason-
When demand and supply equally increases it means that there is no need to change in price level hence output increases.
d. A reduction in aggregate demand in the relatively flat portion of the aggregate supply curve Price level does not change (much or at all), but real output declines.
The correct option is B. Price level does not change (much or at all), but real output declines.
e. An increase in aggregate demand and a decrease in aggregate supply Price level increases, but the change in real output is indeterminate.
The correct option is B. Price level increases, but the change in real output is indeterminate.
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