ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Prices rise; output falls.
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Prices fall; output rises.
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Prices rise; output rises.
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Prices fall; output falls.
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Detailed explanation-1: -Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run? Prices rise; output falls.
Detailed explanation-2: -If an economy is said to be in long-run equilibrium, then Real GDP is at its potential output, the actual unemployment rate will equal the natural rate of unemployment (about 6%), and the actual price level will equal the anticipated price level.
Detailed explanation-3: -Answer and Explanation: If an economy is in its long-run equilibrium, the prices will go up if aggregate demand increases.
Detailed explanation-4: -(B) What will happen to output as the economy moves to the long-run equilibrium? Explain. Over time, labor realizes that the real wage has decreased and demands a higher nominal wage. The increase in the nominal wage causes the short-run aggregate supply curve to decrease, and output returns to Y* .
Detailed explanation-5: -In the model of aggregate demand and aggregate supply, the initial impact of an increase in consumer optimism is to a) shift the short-run aggregate supply curve to the right.