The economy is at full employment and then aggregate demand increases. Describe what happens as an immediate result of the increase in aggregate demand. Describe how the economy adjusts back to full employment
What will be an ideal response?
The immediate effect of an increase in aggregate demand is to increase both the price level and real GDP. The money wage rate does not change, so with the higher price level the real wage rate falls. Eventually, however, workers demand a higher (money) wage rate to compensate for the higher price level. As firms pay the higher money wage rate, aggregate supply decreases. The decrease in aggregate supply means that the price level rises and real GDP decreases. Workers continue to demand a higher money wage rate and aggregate supply continues to decrease until finally the economy returns to full employment. At that point, the money wage rate has increased enough so that the real wage rate is back to its initial level. Real GDP once again equals potential GDP, so the changes in real GDP were only temporary. The price level, though, is higher than its initial level, so the increase in the price level is permanent.
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All of the following statements about secondary credit are true EXCEPT
A) they are temporary, short-term loans to satisfy seasonal requirements. B) the secondary credit interest rate is set above the primary credit rate. C) it is intended for banks not eligible for primary credit. D) borrowers of secondary credit are less financially healthy.
Sandy is a big Star Wars fan and buys a $20 ticket a week in advance to the premier of the new movie. After arriving at the theater, she realizes she left the ticket at home and doesn't have time to return home and get it. Sandy can buy another ticket for $20. She decides not to because seeing the movie isn't worth $40 to her. This is an example of:
A. rational behavior because she values the movie less than $40 B. irrational behavior because she really values the movie more than $40 C. irrational behavior because the initial $20 is a sunk cost. D. rational behavior because it is a commitment device to never forget a ticket at home again.
What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?
a. the supply of loanable funds would shift right and investment would increase. b. the supply of loanable funds would shift left and investment would decrease. c. the demand for loanable funds would shift right and investment would increase. d. the demand for loanable funds would shift left and investment would decrease.
If the price level decreases, what will happen to the level of real GDP supplied?
A. It will usually decrease. B. It will usually increase. C. Nothing. D. It will decrease at first and then increase.