Explain the reasoning behind the shape of the short-run aggregate supply curve in the short run.
What will be an ideal response?
The curve is relatively flat at low levels of price and output because at that level, resources for production, such as machinery and people, are abundantly available and few shortages occur. Thus the per-unit cost of production does not rise that much as output increases. Past full-employment, resources become scarce and there are diminishing returns to additional capital and labor. As scarcity and bottlenecks occur at higher levels of production, the per-unit cost of production increases, causing the slope of the aggregate supply curve to steepen.
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Which of the following will happen if consumption in an economy falls?
A) Firms' revenue fall. B) Labor supply falls. C) Mortgage defaults fall. D) Asset prices rise.
If price elasticity is greater than one, then demand is said to be elastic
Indicate whether the statement is true or false
If a policy is Pareto optimal:
A. it will hurt no one. B. some of the losses will exceed the gains. C. it will hurt more than 50 percent of the population. D. it will hurt less than 50 percent of the population.
Refer to the above figure. Suppose the economy is in equilibrium at point A. If the Fed tries to stimulate the economy by undertaking an expansionary monetary policy action and this is NOT expected by the people in the economy, we would expect to see
A. aggregate demand increases but people would anticipate this, causing the short-run aggregate supply curve to shift up at the same time, with the new equilibrium of $14 trillion of real GDP and a price level of 100. B. aggregate supply shifts up as people anticipate the effects of the expansionary monetary system. In the short run, real GDP falls to $13 trillion and the price level rises to 120. In the long run, real GDP returns to $14 trillion, and the price level increases further, to 150. C. aggregate demand increases, real GDP increases, and the price level increases. In the long run, aggregate supply would increase and the new long-run equilibrium would be point B. D. aggregate demand increases, real GDP increases, and the price level increases in the short run. In the long run, people realize the real situation, causing the short-run aggregate supply curve to shift up. Real GDP returns to $14 trillion, and the price level increases to 150.