What happens to bring the AD–AS system back into equilibrium when prices are below the equilibrium level? Above the equilibrium level?
What will be an ideal response?
When prices are below the equilibrium level, there is excess demand for goods. This will cause prices to rise, thanks to demand-pull inflation, as businesses raise prices to deal with the high demand. Prices will then rise and stabilize at their equilibrium level.
When prices are above the equilibrium level there will be an excess supply of goods at that price level. Without enough people to purchase goods at their current prices, producers will lower prices to provoke demand. Producers will continue to lower prices until production matches demand and the equilibrium price level is reached.
You might also like to view...
A game in which all the players are better off at the end of the game is a
A) tit-for-tat game. B) dominant strategy game. C) positive-sum game. D) noncooperative game.
Which of the following is false?
a. The most well known price index is the consumer price index, which provides a measure of the trend in the prices of goods and services purchased for consumption purposes. b. The GDP deflator measures the average level of prices of all final goods and services produced in the economy. c. The CPI is the price index that is most relevant to households trying to evaluate their changing financial position over time. d. A price index is equal to the cost of the chosen market basket in the base year, divided by the cost of the same market basket in the current year, times 100.
Which of the following workers would be most likely to work fewer hours as a result of a wage increase?
a. farm worker b. surgeon c. lifeguard d. bartender
Injections include all of the following except
A. Investment. B. Saving. C. Exports. D. Government spending.