In the Aggregate Demand-Aggregate Supply Model, If the Federal Reserve

question 25

Multiple Choice

In the aggregate demand-aggregate supply model, if the Federal Reserve decides to decrease the nominal money supply,

• A)current output will fall, but the price level will rise.
• B)current output will rise, but the price level will fall.
• C)current output and the price level will both rise.
• D)current output and the price level will both fall.

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Definitions:

Diminishing Returns

A principle stating that as more of a variable input is added to a fixed input, beyond some point, the additional output from the additional input will decrease.

Marginal Cost

The financial outlay required to create another unit of a good or service.

Average Total Cost

The total cost of production (fixed plus variable costs) divided by the number of goods produced, essentially the per unit production cost.

Average Variable Cost

The total variable costs (like materials and labor) divided by the quantity of output produced, indicating the cost of producing each unit.