Use the Following to Answer Questions

question 161

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 at point A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD₂. Which of the following statements best explains how the economy responds to restore long-run macroeconomic equilibrium?

• A) The increase in the price level to P_b reduces real GDP demanded, shifting the aggregate demand curve back to AD₁, returning the economy to its potential output at A.
• B) Firms produce more in anticipation of future higher prices, thus shifting the SRAS curve upward until the gap is eliminated at D.
• C) Firms and workers will negotiate higher nominal wages to restore lost purchasing power. This shifts the SRAS curve to the left until the gap is eliminated at D.
• D) The increase in the price level to P_b decreases consumption which in turn leads firms to cut production shifting the SRAS curve to the left until the gap is eliminated at D.

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Definitions:

International Trade

The exchange of goods and services across national borders, influenced by comparative advantages and trade policies.

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The proportion of total national or group income earned by individuals or entities, often analyzed to assess economic inequality.

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In-Kind Benefit

A benefit given in the form of goods or services.