Consider the AD/AS Macro Model

question 1

Multiple Choice

Consider the AD/AS macro model. A permanent demand shock that causes equilibrium output to rise above potential output will

• A)allow a stable expansion of real income over time.
• B)be negated in the long run, through the economy's adjustment process.
• C)result in a price level lower than that preceding the demand shock.
• D)always reverse itself.
• E)set off an endless cycle of price rises and increases in unemployment.

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Definitions:

Predetermined Overhead

An estimated rate used to allocate overhead costs to products or services based on expected activities and costs.

Direct Materials

Materials that can be directly linked to the production process and form a fundamental component of the final product.

Direct Labor-Hours

The cumulative hours that employees actively participating in manufacturing processes have worked.

Predetermined Overhead

An estimated rate used in manufacturing to allocate overhead costs to products or services based on a certain activity measure.