ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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a decrease in investment.
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a decrease in profits tax rate.
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an increase in labour cost.
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an increase in population.
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Detailed explanation-1: -A decrease in aggregate supply in the short-run aggregate market results in an increase in the price level and a decrease in real production. The level of real production resulting from the shock can be greater or less than full-employment real production.
Detailed explanation-2: -A decrease in aggregate supply from SRAS1 to SRAS2 reduces real GDP to Y2 and raises the price level to P2, creating a recessionary gap of YP − Y2. In the long run, as prices and nominal wages decrease, the short-run aggregate supply curve moves back to SRAS1 and real GDP returns to potential.
Detailed explanation-3: -If the aggregate supply-also referred to as the short-run aggregate supply or SRAS-curve shifts to the right, then a greater quantity of real GDP is produced at every price level. If the aggregate supply curve shifts to the left, then a lower quantity of real GDP is produced at every price level.
Detailed explanation-4: -A decrease in capital reduces the amount of resources available in the economy, hence will shift the long-run aggregate supply curve to the left. In the short run, resources might not be fully utilized because prices are rigid or sticky.