ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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a widening salary tax base
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destruction of infrastructure due to an earthquake
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a cut in government expenditure on elderly health services
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an increase in the number of people migrating to other countries
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Detailed explanation-1: -Declines in both aggregate demand and aggregate supply will put downward pressure on real GDP. However, they have opposite effects on the price level. Ordinarily, a reduction in aggregate supply would put upward pressure on the price level, but this effect is mitigated by the reduction in aggregate demand.
Detailed explanation-2: -If aggregate demand increases to AD 2, in the short run, both real GDP and the price level rise. If aggregate demand decreases to AD 3, in the short run, both real GDP and the price level fall.
Detailed explanation-3: -If aggregate demand (AD) decreases, the AD curve shifts to the left. This lowers GDP output and prices. If short-run aggregate supply (SRAS) increases, the SRAS curve shifts to the right. This lowers prices and increases output.
Detailed explanation-4: -A decrease in aggregate demand in the long-run aggregate market results in an increase in the price level but no change in real production. The level of real production resulting from the aggregate demand shock is full-employment real production.