a. If a large decrease in health insurance premiums reduces national labor costs
ID: 2429404 • Letter: A
Question
a. If a large decrease in health insurance premiums reduces national labor costs, the aggregate _______ (demand / supply ) curve will shift to the _______ (left / right). As a result, the price level will _______ (increase / decrease / not change) and output will _______ (increase / decrease / not change). b. If businesses become optimistic that business conditions will improve, the aggregate _______ (demand / supply ) curve will shift to the _______ (left / right). As a result, the price level will _______ (increase / decrease / not change) and output will _______ (increase / decrease / not change). Part II: Answer one and only one of the following questions, in your own words, by writing the letter and your response on a separate row. (2 points) c. Give and explain one of the three reasons for the downward slope of the aggregate demand curve. d. Explain why the short-run aggregate supply curve is relatively flat below the full employment level of output and relatively steep above it.
Explanation / Answer
1) A reduction in labor costs will result in increased production so aggregate supply curve will shift to the right. Such a shift is expected to raise the GDP but reduce the level of price in the economy.
2) Business optimism will result in increased investment spending so aggregate demand curve will shift to the right. Such a shift is expected to raise the GDP as well as the level of price in the economy. Hence price level also rises
c) One of the three reasons for the downward slope of the aggregate demand curve is the wealth effect. Suppose the price level falls. This implies that accumulated wealth that people have is now more valuable. This implies people treat themselves as more wealthy and they start consuming more. Consumption spending increases which increases aggregate demand. Thus, fall in price level is associated with a rise in aggregate spendning which causes AD to slopes down.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.