Figure 7-6 -Refer to Figure 7-6. Suppose the Economy Is Initially at Is

question 49

Multiple Choice

Figure 7-6
-Refer to Figure 7-6. Suppose the economy is initially at point A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD₂. What happens in the new short run?

• A) Firms increase output because product prices rise while real wage falls.
• B) Firms increase output because product prices and real wage rise.
• C) Firms will have to pay higher nominal wages and employ more workers to supply the increased output.
• D) The price level increases to P_b, real wages, nominal wages, and employment increase.

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Definitions:

Optimization Model

An optimization model is a mathematical framework designed to find the most efficient solution to a problem from a set of possible solutions.

Deterministic

Pertains to processes or systems where no randomness is involved in the development of future states, implying exact predictability given initial conditions.

Optimal Solution

The best possible outcome from a selection of alternatives, based on a specific set of criteria or constraints.

Constraints

Limitations or restrictions that affect the planning, execution, and outcome of projects or processes.