is more d. production is less profitable and employment falls 6. Menu costs help

Question

is more d. production is less profitable and employment falls 6. Menu costs help explain asticky-priss theory b. misperceptions theory c. sticky-wage theory. d. All of the above are correct. Consider the exhibit below for the following questions. Figure 1 tech 17. Refer to Figure 1. A decrease in taxes would move the economy from C to a. B in the short run and the long run. b. D in the short run and the long run. B in the short run and A in the long run. d. D in the short run and C in the long run. 18. Refer to Figure 1. If the economy is at A and there is a fall in aggregate demand, in the short run the economy a. stays at A. moves to B c. moves to C C moves to D

Explanation / Answer

17) c is correct

Decrease in taxes increases aggregate demand and this shifts AD which is negatively sloped to the right resulting in short run equilibrium at B. But at B output is above full employment and this decreases aggregate supply which is upward sloping to the left resulting in long run equilibrium at A.

18) d is correct

Decrease in aggregate demand shifts the downward sloping curve AD to the left resulting in new short run equilibrium at D.

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