Other things equal, what effect will each of the following have on the equilibri

Question

Other things equal, what effect will each of 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.

b. An increase in aggregate supply, with no change in aggregate demand (assume that prices and wages are flexible upward and downward).

c. Equal increase in aggregate demand and aggregate supply.

d. A reduction in aggregate demand in the relatively flat portion of the aggregate supply curve.

e. An increase in aggregate demand and a decrease in aggregate supply.

Explanation / Answer

a. An increase in aggregate demand in the steep portion of the aggregate supply curve will lead to higher level of prices and comparatively low level of output. Price level increase a lot while output level increase by only a litte.

b. Price leve decreases while ouput increases.

c. Price remains constant but output increases.

d. Price level decrease by a little but output by a lot.

e. If the increase in aggregate demand and decrease in aggregate supply are in the same proportion, output will remain constant while priice level increase.

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