When we consider an upward-sloping AS curve and a downward-sloping AD curve, a d

Question

When we consider an upward-sloping AS curve and a downward-sloping AD curve, a decrease in aggregate expenditure is reflected as: a leftward shift of the AS curve, which increases the equilibrium price level and decreases equilibrium income a rightward shift of the AD curve, which increases bothe the equilibrium price level and equilibrium income a leftward shift of the AD curve which decreases bothe the equilibrium price level and equilibrium income a leftward shift of the AD curve, which increases bothe the equilibrium price level and decreases income. Which of the following statements concerning the long-run (Classical) AD and AS model is true? An increase in AD increases real GDP only temporarily An increase in AD increases real GDP by a multiple o f the initial increase in expenditures Prices are fixed A change in AD leads to a permanent change o f higher output.

Explanation / Answer

26. AE is decreased when government increases taxes or cuts spending. With this, consumption spending falls. There is a shift in the IS curve to the left exhibiting a fall in (disposable) income. Fall in the interest rate stimulates investment spending but consumption falls as income falls. With unchanged price level and lower income, the aggregate demand curve AD shifts downward to the left, decreasing income and price level.

Hence the correct option is C.

27. Again, AE is increased when governmenteither initiates a tax cut or increases spending. This causes the income rise multiple times, precisely by the amount Y × 1/(1 – MPC).

Hence, the correct option is B

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