assume that (a)the price level is flexible upward but not downward and (b) the e

Question

assume that (a)the price level is flexible upward but not downward and (b) the economy is currently operating full employ output. Other things equal, how will each of the followeing affect the equilibrium price level and equalibrium level of real output in the short run?
a. an increase in agg demand
b.a decrease in agg supply with no change in aggregate demand
c. equal increases in agreggate demand and agg supply
d. decrease in agg demand
e. an increase in agg deamnd and exceeds an increase in agg supply

Explanation / Answer

a)1. IT WILL INCREASE THE PRICE LEVEL, THIS EXCESS DEMAND LEADS TO AN EQUILIBRIUM LEVEL OF OUTPUT THAT IS MORE THAN FULL EMPLOYMENT LEVEL OF OUTPUT. IT GIVES RISE TO INFLATIONARY GAP.

b) DECREASE IN SUPPLY WITH SAME DEMAND WILL INCREASE THE PRICE LEVEL

AND THE EQUILIBRIUM LEVEL OF OUT WILL BECOME UNDEREMLOYMENT EQUILIBRIUM.

c)THIS IS NOT POSSIBLE BECAUSE RESOURCESES ARE ALREADY FULLY EMPLOYED

PRICES WILL RISE IN THE ECONOMY AS DEMAND EXCEEDS SUPPLY.

d) DECREASE IN AGREGATE DEMAND WILL LEAD DECREASE IN PRICES. THAT IS DEFLATION. AND EQUILIBRIUM LEVEL OF OUTPUT WILL BE UNDEREMPLOYMENT EQUILIBRIUM.

e) PRICE RISE WILL BE THERE.AND ECONOMY IS ALREADY AT EQUILIBRIUM LEVEL OF OUTPUT. THERE WILL BE INFLATIONARY GAP. THE EQUILIBRIUM LEVEL OF OUTPUT IS MORE THAN THE OUTPUT ACHIEVED AT THE FULL EMPLOYMENT OF RESOURCES

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