Aggregate Demand And Supply

1.

Refer to the diagram. If Q₁ represents the full-employment output, then the curve labeled B is the:

LRAS curve

SRAS curve

The curve labeled B in the diagram represents the SRAS curve. SRAS stands for Short-Run Aggregate Supply, which shows the relationship between the price level and the quantity of goods and services that firms are willing and able to supply in the short run. The SRAS curve is upward sloping, indicating that as the price level increases, firms are willing to produce and supply more output. In this context, if Q1 represents the full-employment output, it means that at this level of output, the SRAS curve intersects with the aggregate demand curve, representing equilibrium in the short run.

Explanation

The curve labeled B in the diagram represents the SRAS curve. SRAS stands for Short-Run Aggregate Supply, which shows the relationship between the price level and the quantity of goods and services that firms are willing and able to supply in the short run. The SRAS curve is upward sloping, indicating that as the price level increases, firms are willing to produce and supply more output. In this context, if Q1 represents the full-employment output, it means that at this level of output, the SRAS curve intersects with the aggregate demand curve, representing equilibrium in the short run.

2.

Refer to the diagram. Assume that wages are initially set on the basis of price level P₁ and that the economy is operating at its full-employment level of Q_f. The short-run effect of an increase in demand is best reflected by a move from:

Point e to point g

Point e to point b

Point e to point a

Point e to point c

In the diagram, point e represents the initial equilibrium where wages are set based on price level P1 and the economy is operating at full employment level Qf. An increase in demand will lead to an increase in output and employment in the short run. This will cause a shift in the aggregate demand curve to the right, resulting in a move from point e to point g. At point g, both output and price level will be higher than at point e, reflecting the short-run effect of an increase in demand.

Explanation

In the diagram, point e represents the initial equilibrium where wages are set based on price level P1 and the economy is operating at full employment level Qf. An increase in demand will lead to an increase in output and employment in the short run. This will cause a shift in the aggregate demand curve to the right, resulting in a move from point e to point g. At point g, both output and price level will be higher than at point e, reflecting the short-run effect of an increase in demand.

3. If the economy is initially at a point on its long-run aggregate supply curve, a decrease in aggregate demand will:

Permanently increase unemployment

Temporarily increase unemployment

Permanently increase inflation

Temporarily increase inflation

A fall in aggregate demand will temporarily reduce the rate of inflation and increase unemployment.

Explanation

A fall in aggregate demand will temporarily reduce the rate of inflation and increase unemployment.

4. Refer to the diagram above. If P₁ is the price level and Q_f is the full-employment output, then the long-run aggregate supply curve:

Is AS1

Connects points a and e

Is AS2

Connects points e, b, and d

The long-run aggregate supply curve connects points e, b, and d because these points represent different levels of output at the full-employment level. Point e represents the full-employment output level, while points b and d represent output levels above and below full employment, respectively. The curve connects these points to show the relationship between price level and output in the long run.

Explanation

The long-run aggregate supply curve connects points e, b, and d because these points represent different levels of output at the full-employment level. Point e represents the full-employment output level, while points b and d represent output levels above and below full employment, respectively. The curve connects these points to show the relationship between price level and output in the long run.

5.

Refer to the diagram. Assume aggregate demand is initially given by AD₁ and cost-push inflation pushes the aggregate supply curve from AS₁ to AS₂. If the government uses fiscal policy to restrain the inflation:

Aggregate demand will increase to AD2

Aggregate supply will shift even further to the left

Aggregate demand will shift to the left

The economy will move from point b to point a

If the government uses fiscal policy to restrain inflation, it will typically involve reducing government spending and/or increasing taxes. This will lead to a decrease in aggregate demand as consumers and businesses have less money to spend. As a result, the aggregate demand curve will shift to the left, causing a decrease in overall spending in the economy.

Explanation

If the government uses fiscal policy to restrain inflation, it will typically involve reducing government spending and/or increasing taxes. This will lead to a decrease in aggregate demand as consumers and businesses have less money to spend. As a result, the aggregate demand curve will shift to the left, causing a decrease in overall spending in the economy.