Refer to the diagram and assume the economy initially is in equilibrium at point a. Suppose the aggregate demand declines from AD 1 to AD 2 and the economy moves from a to c. In the mainstream view, the resulting decline in the price level need not shift the short-run aggregate supply curve from AS 1 to AS 2 because:
A. supply creates its own demand.
B. nominal wages are (at least for a time) inflexible downward.
C. firms misperceive the price-level decline as being permanent.
D. deflation reduces the purchasing power of the dollar.
B. nominal wages are (at least for a time) inflexible downward.
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If the marginal propensity to consume is 0.7, the expenditure multiplier is
a. 7.0 b. 0.7 c. 3.0 d. 3.3 e. not determinable without additional information.
The supply curve of a depletable natural resource is usually
a. downward sloping because the resource runs out over time. b. upward sloping because more of the resource can be profitably extracted at higher prices. c. upward sloping because the price of the resource rises over time. d. vertical because the supply of the resource is fixed.
If the government were to increase income taxes, we would predict:
A. a shift in aggregate demand to the right. B. a downward movement along the aggregate demand curve. C. a shift in aggregate demand to the left. D. an upward movement along the aggregate demand.
The 4 components or determinants of aggregate demand
What will be an ideal response?