Use the Following to Answer Questions

question 140

Multiple Choice

Use the following to answer questions .
Exhibit: Using the Aggregate Demand/Aggregate Supply Model 1
-(Exhibit: Using the Aggregate Demand/Aggregate Supply Model 1) Suppose the economy is initially in short-run equilibrium at B. Policy makers could either pursue a stabilization policy or allow the economy to adjust on its own. What is the difference between the two policy choices, if any?

• A) A stabilization policy would return real GDP to its potential at a price level of P_a while a nonintervention policy would return real GDP to its potential at a price level of P_d.
• B) A stabilization policy would return real GDP to its potential at a price level of P_d while a nonintervention policy would return real GDP to its potential at a price level of P_a.
• C) Both policies would return real GDP to its potential at a price level of P_a.
• D) Both policies would return real GDP to its potential at a price level of P_d.

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Definitions:

Fixed Production Cost

Costs that do not vary with the level of production, such as rent, insurance, and salaries of permanent staff.

Ending Inventory

The total value of all unsold goods at the end of an accounting period, including raw materials, work-in-progress, and finished goods.

Beginning Inventory

The value of a company's inventory at the start of an accounting period, before any purchases or sales have been made.

Absorption Costing

An accounting method that assigns all manufacturing costs, including both variable costs and fixed overhead, to the production units, making them more expensive on a per-unit basis.