What is the difference in the explanation of the shape of the aggregate demand curve and a single product demand curve? After all, both demand curves show an inverse relationship between price and quantity.
What will be an ideal response?
The aggregate demand curve shows an inverse relationship between the price level (the general level of all prices) and real domestic output (the equilibrium quantity of all products). The explanation of this inverse relationship is based on the real-balances effect, the interest-rate effect, and the foreign-purchases effect. In this case, as the price level rises, the quantity of real domestic output decreases.
The supply and demand model for a particular product shows an inverse relationship between the price of that product and the quantity of that product. The explanation for the inverse relationship between price and quantity in the demand for a single product is based on the substitution and income effects. The substitution effect is not applicable to the aggregate case because there is no substitute for all products in the economy. Also, the income effect is not applicable to the aggregate case because income now varies with aggregate output.
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A rational expectation of the inflation rate is
A) always correct. B) a forecast based on the forecasted actions of the Fed and other relevant determinant factors. C) a forecast based only on the historical evolution of inflation over the last 100 years. D) an expected inflation rate between 5 percent and 10 percent. E) an expected inflation rate between 1 percent and 5 percent.
If a perfectly competitive wheat farmer is maximizing its profit and then increases its output, the farmer's
A) total revenue increases, but total cost rises by more so that the farmer's total profit decreases. B) total revenue decreases and total cost increases, both thereby decreasing the farmer's total profit. C) total revenue does not change but total cost increases, thereby decreasing the farmer's total profit. D) marginal revenue increases, but so does marginal cost, so that the farmer's total profit increases. E) total revenue and total cost both rise, but the effect on the farmer's total profit is uncertain.
Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant
A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease
An advantage of the corporate form of business organization is
A) unlimited liability. B) easier access to capital. C) that profits are taxed only on one level. D) government supervision of its activities.