Explain how the AD curve can be derived from the IS-MP model
What will be an ideal response?
The aggregate demand curve (AD) is all of the equilibrium combinations of the output gap and the price level. Consider the effect of an increase in the price level on the IS curve. In the money market, an increase in the price level causes the demand for money curve to shift to the right, increasing the equilibrium interest rate. A higher interest rate leads to a decline in aggregate expenditure, which causes a movement up along the IS curve, resulting in a lower level of real GDP relative to potential GDP. The increase in the price level causes a movement along the IS curve. If we kept varying the price level and tracing the effects on the IS curve, we would have plotted all the points on the aggregate demand curve.
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Spot checks are typically a solution to the:
A. manager-worker, principal-agent problem. B. manager-consumer, principal-agent problem. C. consumer-worker, principal-agent problem. D. None of the statements is correct.
If the demand for electricity is inelastic, then if the local electric company wants to increase its total revenue, it should ________ its price.
A. frequently change B. not change C. raise D. lower
“In the last four months, GDP has been declining and many sectors have shown a contraction in business activity. Still, employment has remained constant. We are currently in a recession.” Evaluate this statement.
What will be an ideal response?
Along with changes in the level of economic activity, measured by GDP, what other economic variable tends to rise and fall as a consequence?
A. Precipitation B. Regulation C. Circulation D. Unemployment