How does an increase in the price level affect the aggregate quantity of goods and services demanded?
What will be an ideal response?
An increase in the price level decreases the aggregate quantity of goods and services demanded for three reasons. First, it decreases the buying power of money. As a result, people decrease their demand for goods and services. Second, it raises the real interest rate. The real interest rate rises because an increase in the price level increases the demand for money, which raises the nominal interest rate, which, in the short run, raises the real interest rate. When the real interest rate rises, people and businesses delay plans for investment and purchases of big-ticket items. Finally, an increase in the price level makes domestically produced goods and services more expensive relative to foreign-produced goods and services. As a result, people and firms buy more foreign produced and fewer domestically produced goods and services, which decreases the quantity demanded of domestically produced goods and services.
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The unit-elastic demand curve bends in the middle toward the origin of the graph and at either end moves closer to the axes.
Answer the following statement true (T) or false (F)
In going from the simple to the flexible accelerator, j is set at ________, and v* is ________
A) one, allowed to vary B) one, set at less than one C) less than one, set at less than one D) less than one, set at one E) less than one, allowed to vary
Ceteris paribus, if the price of jet fuel fell, what effect would it have on the market for air travel?
a. an increase in equilibrium price and an increase in equilibrium quantity. b. an increase in equilibrium price and a decrease in equilibrium quantity. c. a decrease in equilibrium price and an increase in equilibrium quantity. d. a decrease in equilibrium price and a decrease in equilibrium quantity.
The government program that provides low-income people with government-issued stamps that can be redeemed for specific food items at food stores and supermarkets is the
a. emergency aid program b. food stamp program c. school lunch program d. hunger relief program e. meals on wheels program