ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Output falls; prices are unchanged from the initial value.
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Prices fall; output is unchanged from its initial value.
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Output and the price level are unchanged from their initial values.
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Prices rise; output is unchanged from its initial value.
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Output rises; prices are unchanged from the initial value.
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Detailed explanation-1: -Then suppose there is a increase in military spending due to rising international tensions. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run? Prices rise; output is unchanged from its initial value.
Detailed explanation-2: -Answer and Explanation: If an economy is in its long-run equilibrium, the prices will go up if aggregate demand increases.
Detailed explanation-3: -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-4: -An increase in consumer spending will cause the AD curve to increase. As a result, output increases and unemployment decreases. Unfortunately, this positive AD shock also means that inflation increases: An increase in AD leads to an increase in real GDP and the price level.
Detailed explanation-5: -The amount of output supplied will be greater than aggregate demand. Prices will begin to fall to eliminate the surplus output. As prices fall, the amount of aggregate demand increases and the economy returns to equilibrium.