If the macro equilibrium is below the full employment level (to the left of the natural rate of...
Question:
If the macro equilibrium is below the full employment level (to the left of the natural rate of output), an increase in aggregate demand will:
A. Decrease prices and decrease output.
B. Decrease prices and increase output.
C. Increase prices and decrease output.
D. Increase prices and increase output.
Explaining Aggregate Demand:
Cumulative demand in an economy consists of the wants of households, firms, government, and foreign sectors. The demand made by each of the sectors is private consumption, financing, administrative, and foreign trading expenditure, respectively.
Answer and Explanation: 1
Become a Study.com member to unlock this answer! Create your account
View this answerThe correct option is option D).
When the aggregate demand increases, it leads to the jump of the AD curve towards the right, and as there is already...
See full answer below.
Ask a question
Our experts can answer your tough homework and study questions.
Ask a question Ask a questionSearch Answers
Learn more about this topic:
Get access to this video and our entire Q&A library
Aggregate Supply and Aggregate Demand (AS-AD) Model
from
Chapter 7 / Lesson 3
17K
Understand the aggregate demand-aggregate supply model and its features. Read more about the curve shifts of this and learn the AD-AS model through an example.
Related to this Question
- Suppose an economy is in long-run equilibrium at the full-employment level of output. If government spending then increases: A. an inflationary gap is created because the aggregate demand curve shifts to the right. B. an inflationary gap is created becaus
- The short-run aggregate supply curve (AS) is upward sloping because? A) an increase in output causes an increase in employment, a reduction in unemployment, an increase in the nominal wage, and an increase in the price level. B) a reduction in the aggreg
- If the aggregate supply curve is upward sloping, a decrease in aggregate demand will cause: a. a decrease in the price level and an increase in unemployment. b. a decrease in the price level and a decrease in unemployment. c. an increase in the price leve
- According to the Keynesian model of macroeconomic equilibrium, a decrease in aggregate demand a. will not cause nominal wages to decline sufficiently to restore full employment. b. will cause an increase in aggregate supply that will restore full employme
- If prices and wages are inflexible downward, a decrease in aggregate demand will: a. reduce the price level but not real output. b. increase short-run aggregate supply. c. decrease short-run aggregate supply. d. reduce real output but not the price level.
- 1. The long-run aggregate supply curve will shift outward to the right when: a. there is economic growth. b. the real-balance effect increases. c. the amount of labor decreases. d. the price level
- If the economy is at full employment, increases in government spending: a) have a multiplier effect on equilibrium output.. b) have no effect on the aggregate price level. c) are primarily absorbe
- Beginning at macro equilibrium, inflation occurs because aggregate ________. (a) supply increases more rapidly than aggregate demand (b) supply and aggregate demand increase at the same rate (c) supply and aggregate demand decrease at the same rate (d) de
- If the short-run aggregate supply curve (SRAS) is horizontal, then an increase in aggregate demand leads to A. an increase in real output, an increase in the price level, and a decrease in unemployment. B. an increase in real output, a decrease in the pri
- In the aggregate demand relation, an increase in the price level causes output to decrease because of its effect on: a. government spending. b. the expected price level. c. firms' markup over labour costs. d. the nominal wage. e. the interest rate.
- An increase in aggregate demand in the long-run will result in _____ in full employment real GDP and _____ in the price level. a. no change; an increase b. an increase; no change c. a decrease, no change d. no change; a decrease
- A decrease in inflationary expectations that causes firms to decrease their prices shifts the: A. aggregate demand curve to the right. B. aggregate supply curve to the left. C. aggregate demand curve
- According to the Keynesian model of macroeconomic equilibrium, a decrease in aggregate demand a. will not cause unemployment. b. will cause an increase in aggregate supply that will restore full employment. c. will not cause nominal wages to decline suffi
- The natural level of employment will increase when which of the following occurs? A) a decrease in the markup of prices over costs. B) an increase in the natural level of output. C) an increase in the actual unemployment rate. D) an increase in unemploym
- According to Keynesian theory, if equilibrium real GDP is below the full-employment level, then an increase in aggregate demand will result in which of the following changes in equilibrium? a. Real GDP will rise, but the price level will remain constant.
- According to classical macroeconomic theory, if real GDP is at the full-employment level, then an increase in aggregate demand will result in which of the following changes in equilibrium? a. Real GDP will rise, but the price level will remain constant.
- According to classical macroeconomic theory, if real GDP is at the full-employment level, an increase in aggregate demand will result in which of the following changes in equilibrium? a. Real GDP will rise, but the price level will remain constant. b. Rea
- 1. Decreased interest rates will shift the aggregate demand curve to the _ and _ output demanded. A. right; decrease B. left; increase C. right; increase D. left; decrease 2. The long-run aggrega
- A traditional expansionary gap is created when the aggregate demand curve moves to the: A. right of the natural rate of output; inflation rises and unemployment falls. B. left of the natural rate of output; inflation falls and unemployment rises. C. right
- If the price level falls and the money wage rate does not change, some firms {Blank} and there is {Blank}. A. start up; a rightward shift of the aggregate supply curve B. shut down; a leftward shift of the aggregate supply curve C. shut down; a decrease i
- If the short-run macroeconomic equilibrium is of the economy's potential output, then there is a(n) and the aggregate price level is expected to. a. to the left; inflationary gap; fall b. to the left; recessionary gap; fall c. to the right; recessionary g
- a. Increasing the price of raw material is a positive or negative productivity shock? b. If shocks to productivity increase the natural rate of output, how is output related to inflation? c. If the natural rate of unemployment remains unchanged, how is
- In the aggregate demand relation, a reduction in the price level causes output to increase because of its effect on? A) firms' markup over labour costs. B) the nominal wage. C) the interest rate. D) the expected price level. E) government spending.
- If aggregate demand rises in the short run: A. it pushes up the price level. B. it decreases national output. C. it increases full employment. D. all of the above
- In the short-run, an increase in aggregate demand leads to _ price level and _ in unemplyment. a. An increase; a decrease b. An increase; no change c. No change; no change d. An increase; an increase
- Following an increase in government spending, the output supply curve shifts right because ____________ increases. A. The capital stock. B. Equilibrium Employment. C. Total factor productivity. D. All the above.
- An increase in aggregate demand in the long-run will result in ................ in full employment real GDP and .................. in the price level. a. no change; an increase b. an increase; no change c. a decrease, no change d. no change; a decreas
- Expansionary fiscal policy increases budget deficit, the resulting increase in aggregate demand could be inflationary. Assume that (i) the price level is flexible upward but not downward and (ii) the economy is currently operating at its full-employment o
- The declining marginal product of labor and the increasing upward pressure on money wages as output and employment increase explain why the Keynesian aggregate supply schedule is: a. downward sloping b. horizontal c. vertical d. fixed e. upward sloping
- A demand shock that increases real GDP above its full-employment level will, in the long run, a. lead to a higher wage rate and an upward shift of the aggregate supply curve. b. lead to a lower wage rate and a downward shift of the aggregate supply curve.
- If aggregate demand is too great: A. Equilibrium will still occur at full employment GDP. B. Cyclical unemployment will occur. C. There will be an inflationary GDP gap. D. Aggregate supply will increase.
- If left alone, the boom experienced by an economy will cause the short-run A) aggregate supply curve to shift downward until the equilibrium GDP is back to full employment. B) aggregate supply curve t
- If the aggregate demand increases, and as a result, real national output and employment increase but the price level remains unchanged, we can assume that: A. the money supply has declined B. aggregate demand intersects aggregate supply in the Keynesian r
- A decrease in the supply of money generally leads to a decrease in: A) the level of prices B) output and employment C) output, employment, and the level of prices D) the level of prices, followed by an increase in output and employment
- If the workforce is paid more frequently, then A. nominal output will decrease. B. velocity of money will increase. C. the money supply will increase. D. price level will decrease. E. real output will decrease.
- A rising aggregate price level [{Blank}] an economy's interest rates and therefore [{Blank}] output demanded. a) increases; increases, b) increases; reduces, c) reduces; increases, d) reduces; reduces.
- In the long run, continued increases in aggregate demand not matched by similar increases in aggregate supply will cause: a. an increase in the full-employment level of real GDP. b. a recessionary gap. c. a decrease in the price level. d. an increase in t
- When the price level falls, the aggregate planned expenditure curve shifts, equilibrium expenditure, and there is a movement along the aggregate demand curve. A. upward; increases; upward B. downward; decreases; downward C. upward; decreases; downward D.
- If aggregate supply increases while aggregate demand decreases, a. equilibrium real GDP will decline, but we cannot predict what will happen to the price level. b. the price level will increase, but we cannot predict what will happen to equilibrium real G
- From a short-run equilibrium situation where the real output of the economy is less than the natural level of real output, real wages will tend to ____ and real interest rates will tend to _____. A. fall; fall. B. fall; rise. C. rise; fall. D. rise; rise
- There are shocks to productivity that alter the natural rate of output but leave the natural rate of unemployment unchanged. Use the AD-AS model to examine the short run changes in output and inflation that arise from an increase in the natural rate of ou
- According to Keynesian theory, if equilibrium real GDP is below the full-employment level, then an increase in aggregate demand will result in which of the following changes in equilibrium? a. Real GDP and the price level will both rise. b. Real GDP will
- What happens to prices and output when the long-run aggregate-supply curve shifts right? a. Prices and output both increase. b. Prices and output both decrease. c. Prices increase and output decreases. d. Prices decrease and output increases.
- An outward shift of the long-run aggregate supply curve: a. will raise an economy's standard of living. b. increases unemployment. c. is caused by a depletion of natural resources. d. increases the aggregate price level.
- An increase in the price level A. shifts the curve upward and decreases equilibrium expenditure. B. shifts the curve downward and increases the equilibrium expenditure. C. shifts the curve downward and decreases the equilibrium expenditure. D. shifts the
- The aggregate demand curve is: a) Horizontal when there is considerable unemployment in the economy. b) Vertical if full employment exists. c) Downward sloping because production costs decrease as real output increases. d) Downward sloping because of int
- The effect of the spending multiplier is lessened if: A. the price level is constant with an increase in aggregate demand. B. the price level falls with an increase in aggregate supply. C. the price level is constant with an increase in long-run aggregate
- When aggregate demand shifts right along the short-run aggregate supply curve, unemployment: a. falls, so there are upward pressures on wages and prices. b. falls, so there are downward pressures on wages and prices. c. rises, so there are upward pressure
- The aggregate demand curve is: a) Horizontal when there is considerable unemployment in the economy, b) Vertical if full employment exists, c) Downward sloping because production costs decrease as real output increases, d) Downward sloping because of
- An inflationary gap is the amount by which A. aggregate demand intersects the short run aggregate supply curve B. Current output exceeds the full employment level of output C. When savings exceeds
- In a recession, expansionary monetary policy is designed to: A. decrease aggregate demand so that real prices will decrease, which is good for the economy. B. increase aggregate demand, which will increase real output and increase employment. C. increase
- Suppose the economy is at full employment when suddenly interest rates on government bonds decrease. As a result, you expect that: a. the economy will enter a recessionary gap b. output will decrease c. prices will increase d. prices will remain constant
- If an economy is at full employment and investment spending decreases while all other levels of spending remain constant, then the price level: a. increases and output decreases b. decreases and output decreases c. increases and output increases d. decrea
- 1. If we observe an increase in real GDP and an increase in the price level after an increase in aggregate demand, we can conclude that? A. the aggregate supply curve is upward sloping. B. the economy is now at full employment. C. the aggregate supply cur
- What is the expected effect of an increase in unemployment benefits on equilibrium output and the equilibrium price level in the medium run? A) Neither prices nor output will change B) Prices will increase while output will remain the same C) Prices will
- If income is below the full-employment level, what would be the result of an expansionary fiscal policy? A. an increase in total production and a decrease in the price level B. a decrease in total production and an increase in the price level C. a decreas
- Given a fixed upsloping AS curve, a rightward shift of the AD curve will: a. increase the price level but not real output b. increase both the price level and real output c. cause cost-push inflation d. increase real output but not the price level
- An increase in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run? A. The price level will rise, and the level of GDP will fall. B. The price level will
- Equilibrium real GDP rises after the dollar strengthened. From this, we can conclude that: a) the increase in aggregate demand was greater than the decrease in aggregate supply. b) the decrease in aggregate demand was more than the increase in aggregate s
- A decrease in the supply of money will lead to a(n) _____ in equilibrium real GDP and a _____ equilibrium interest rate. A. increase; higher B. increase; lower C. decrease; lower D. decrease; high
- In the short run, a decrease in the money supply causes interest rates to: a. increase, and aggregate demand to shift right b. increase and aggregate demand to shift left c. decrease, and aggregate de
- In the Keynesian model, prices and nominal wages are _______. Because of this, the SRAS curve is upward sloping and, as a result, an increase in the MS leads to ________ in the aggregate PL. a. flexible; an equal proportional decrease b. sticky; an equa
- If investment spending increases while in the up-sloping range of the aggregate supply curve, then A. output will decrease. B. employment will decrease. C. unemployment will decrease. D. price level will decrease. E. interest rates will decrease.
- Which of the following will NOT lead to a rightward shift of the long-run aggregate supply curve? A) increase in capital B) increase in labor C) increase in labor productivity D) increase in aggregate demand
- Using the aggregate supply and demand model, assume the economy is in equilibrium on the intermediate portion of the aggregate supply curve. A decrease in the money supply will decrease the price level and: a. lower both the interest rate and the real GDP
- In the classical macroeconomic model, a decrease in the real wage would cause A) a decrease in the marginal product of labor and an increase in the quantity demanded for labor. B) an increase in the marginal product of labor and an increase in the quant
- Expansionary monetary policy: a. raises interest rates, causing aggregate demand to shift to the left. b. lowers interest rates, causing aggregate demand to shift to the left. c. raises interest rates, causing aggregate demand to shift to the right. d. lo
- According to Keynesians, an increase in the money supply will a. decrease the interest rate, and increase investment, aggregate demand, prices, real GDP, and employment. b. decrease the interest rate, and decrease investment, aggregate demand, prices, r
- According to Keynesians, an increase in the money supply will: a. decrease the interest rate, and increase investment, aggregate demand, prices, real GDP, and employment. b. decrease the interest rate, and decrease investment, aggregate demand, prices,
- In an economy with a horizontal aggregate supply curve, a decrease in taxes will affect price level and employment in which of the following ways? (a) Price Level decreases; Employment increases (b) Price Level increases; Employment increases (c) Price Le
- What effect would a sizable increase in labor productivity (with no change in nominal wages) have on aggregate demand or aggregate supply? Use a diagram to show the expected effects on the equilibrium price level and level of real output. Assume that all
- An increase in the money supply when the economy is experiencing significant unemployment would lead primarily to an increase in: a) Prices, b) Total output, c) Total output and the level of prices, d) The level of prices, and a decrease in total outp
- Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run? A. Aggregate demand will rise, the equilibrium price level will rise, the equilibrium level of GDP will rise. B. Aggregate demand will rise,
- A negative supply shock in the short run causes: a. the aggregate supply curve to shift to the left. b. the price level to fall. c. unemployment to fall. d. equilibrium real GDP to rise.
- Aggregate supply increases when: A. wage rates or interest rates decrease and the economy's price level remains unchanged. B. resource availability is reduced. C. the emigration rate is increased,
- A decrease in the real interest rate: a) Increases the demand side equilibrium GDP, b) Decreases the demand side equilibrium GDP, c) Does not affect the demand side equilibrium GDP, d) Happens as a result of an inflationary gap, e) Both a) and d).
- A decrease in the price level will the nominal interest rate and cause a(n) movement along the aggregate demand curve. A. increase; downward B. decrease; downward C. increase; upward D. decrease; upward E. not affect; downward F. not affect; upward
- Rising productivity will drive increased economic growth and raise the average standard of living, shifting _____ curve to the _____. a. long-run aggregate supply; right b. long-run aggregate supply; left c. aggregate demand; left d. short-run aggrega
- In the classical macroeconomic model, a decrease in the real wage would cause A)a decrease in the marginal product of labor and an increase in the quantity demanded for labor. B)an increase in the m
- In the short run, an increase in the money supply causes interest rates to? a. increase, and aggregate demand to shift right. b. increase, and aggregate demand to shift left. c. decrease, and aggregate demand to shift right. d. decrease, and aggregate
- Assuming a fixed aggregate demand curve, a leftward shift in the aggregate supply curve causes: a. an increase in the price level and a decrease in real GDP. b. an increase in the price level and an increase in real GDP. c. a decrease in the price level a
- Assuming a fixed aggregate demand curve, a leftward shift in the aggregate supply curve causes a (an) a. Increase in the price level and a decrease in real GDP. b. Increase in the price level and an increase in real GDP. c. Decrease in the price level an
- If potential GDP increases, then the: a. aggregate demand curve shifts rightward b. aggregate supply curve shifts leftward c. real wage rate falls d. real wage rate increases e. aggregate supply curve shifts right
- An increase in the exchange value of the dollar will: a. decrease aggregate demand, thereby increasing the price level. b. increase aggregate demand, thereby decreasing the price level. c. decrease aggregate demand, thereby decreasing the price level. d.
- What will happen to the equilibrium price level and real GDP if: a. aggregate demand and aggregate supply both increase? b. aggregate demand increases and aggregate supply decreases? c. aggregate demand and aggregate supply both decrease? d. aggregate dem
- According to Keynesians, an increase in the money supply will: 1) decrease the interest rate, and increase investment, aggregate demand, prices, real GDP, and employment. 2) decrease the interest rat
- An increase in the value of the dollar will: a. increase aggregate supply. b. decrease aggregate supply. c. increase aggregate demand. d. decrease aggregate demand. e. have no effect on aggregate
- Increases in the marginal propensity to consume will: a. shift the aggregate supply curve to the right. b. shift the aggregate supply curve to the left. c. increase the multiplier. d. increase the marginal propensity to save.
- The effect of contractionary monetary policy is to: a. decrease real output and increase the price level. b. increase real output and decrease the price level. c. increase real output and increase the price level. d. decrease real output and decrease t
- The effect of contractionary monetary policy is to: a. decrease real output and increase the price level. b. increase real output and decrease the price level. c. increase real output and increase the price level. d. decrease real output and decrease the
- Aggregate demand is increasing. Other things being equal, which of the following is likely to occur as a result of the increase in aggregate demand? a. An increase in the equilibrium price level. b. An increase in equilibrium real GDP. c. A decrease in ag
- An economy is in macroeconomic equilibrium, producing at its normal capacity level of output. Without long-run economic growth, a persistent increase in aggregate demand is likely to lead to an increase in the level of A. real GDP. B. employment. C. produ
- An expansionary monetary policy would: a. always increase prices and output. b. likely increase prices but not necessarily increase output. c. never increase prices but always increase output. d. not be effective in increasing prices or output.
- If left alone, the recession experienced by an economy will cause the short-run: A) aggregate supply curve to shift downward until the equilibrium GDP is back at full employment. B) aggregate supply
- An increase in the discount rate and an increase in the level of aggregate output will have what effect on the equilibrium interest rate? a. a decrease in the interest rate b. no effect on the interest rate c. an increase in the interest rate d. an indete
- At full employment, an increase in the quantity of money (ceteris paribus) can create a A. cost-push inflation, but an increase in government expenditure cannot. B. demand-pull inflation, but an increase in government expenditure cannot. C. demand-pull i
- Suppose taxes are cut in an economy that is in equilibrium at full employment. In the long run the tax cut will: A. raise real output and raise the price level. B. lower real output and raise the price level. C. raise real output and lower the price level
- Economic growth is best described as: A. an increase in the production possibility curve and an increase in the natural rate of unemployment. B. an increase in the production possibility curve and a leftward shift in long-run aggregate supply. C. a decrea
- A leftward shift in the money demand function would result from: (a) an increase in the interest rate. (b) an increase in real income. (c) a decrease in the interest rate. (d) a decrease in the money supply. (e) a decrease in the price level.
- An increase in the general price level will lead to: a. an upward movement along the short-run aggregate supply curve as firms increase output. b. a rightward shift of the short-run aggregate supply c
Explore our homework questions and answers library
Browse
by subject