Explain what happens in the extended aggregate demand and aggregate supply model when there is a recession.
What will be an ideal response?
With a recession, the aggregate demand curve will decrease or shift left. As the price level decreases from the full-employment level of output, revenues to the firm decrease, and because nominal wages are fixed, the profits for firms will decrease. Firms will have an incentive to decrease output and employment (to reduce labor cost), so real GDP will decrease and employment will fall below its natural rate. This situation is a short-run one, however, because nominal wages (and other input prices) will eventually decrease and shift the short-run aggregate supply curve to the right. The new equilibrium will return to the full-employment level of output but be at a lower price level.
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A depreciating domestic currency is often perceived to be a sign of a(n):
A) economic expansion. B) strong government. C) weak government. D) global slowdown.
A change in a fixed tax will cause the consumption schedule to
a. become steeper. b. become flatter. c. shift in a parallel manner. d. remain fixed as the economy moves along the schedule.
The political attractiveness of tariffs, quotas, and other trade restrictions is primarily the result of
A) the political clout of foreigners. B) the special interest nature of trade restrictions. C) the political clout of domestic consumers. D) the attractiveness of sound economic policies to elected political officials.
Recall the Application about the use of fertilizer and its impact on crop yields to answer the following question(s). The table is taken from this Application.
Bags of Fertilizer Bushels of Corn0851120213531444147Refer to the table above. The farmer increased his total production of corn by 9 bushels per acre after applying:
A. the first bag of fertilizer. B. the second bag of fertilizer. C. the third bag of fertilizer. D. the fourth bag of fertilizer.