ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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misperceptions theory of the short-run aggregate supply curve.
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classical dichotomy theory of the short-run aggregate supply curve.
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sticky-price theory of the short-run aggregate supply curve.
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sticky-wage theory of the short-run aggregate supply curve.
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Detailed explanation-1: -The intuition behind the real wealth effect is that when the price level decreases, it takes less money to buy goods and services. The money you have is now worth more and you feel wealthier. So, in response to a decrease in the price level, real GDP will increase.
Detailed explanation-2: -If the price level is lower than expected, production is less profitable, firms reduce their quantity supplied, so the economy’s output is below its potential.
Detailed explanation-3: -Foreign purchases effect: when price level falls, other things being equal, US prices will fall relative to foreign prices, which will tend to increase spending on US exports and also decrease import spending in favor of US products that compete with imports.
Detailed explanation-4: -This is because purchasing power refers to how much money can buy. When prices go up, buying power goes down because a single unit of currency–for example, one dollar–can no longer acquire the same amount of goods and services as it once could.