Using the aggregate demand-aggregate supply model, explain and demonstrate graphically the short-run and long-run effects of an increase in the money supply
What will be an ideal response?
See figure below.
An increase in the money supply increases aggregate demand, from AD to AD'. The economy moves from point 1 to point 2. In the short run both inflation rate and real output increase. In the long run, wages adjust, decreasing short-run aggregate supply, to AS', raising prices further and reducing real output until the economy returns to the natural level of output. The long-run result is to only increase inflation. The path is from 1 to 2 to 3.
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The income effect of a price increase for a Giffen good outweighs the substitution effect
Indicate whether the statement is true or false
John is trying to decide whether to expand his business or not. If he continues his business as it is, with no expansion, there is a 50 percent chance he will earn $100,000 and a 50 percent chance he will earn $300,000. If he does expand, there is a 30 percent chance he will earn $100,000, a 30 percent chance he will earn $300,000 and a 40 percent chance he will earn $500,000. It will cost him $150,000 to expand. John expects the value of his earnings to be ________ if he expands and ________ if he does not expand.
A. $320,000; $200,000 B. $170,000; $50,000 C. $120,000; $200,000 D. $30,000; $200,000
A price floor keeps a price:
a. from rising above a certain level. b. from decreasing below a certain level. c. at a stabilized point. d. from increasing or decreasing.
Which is the most accurate statement?
A. Although no one theory can explain all poverty in the U.S., welfare dependency probably explains most of it. B. Poverty can be explained mainly by the laziness of the poor. C. There is no theory of poverty that really explains much. D. There are many theories of poverty, and while none can explain all poverty, each does explain some of it.