Consider the AD/AS Model After Factor Prices Have Fully Adjusted

question 14

Multiple Choice

Consider the AD/AS model after factor prices have fully adjusted to output gaps. A reduction in the level of potential output, with aggregate demand constant, will

• A)decrease real output and leave the price level unchanged.
• B)leave real output unaffected and increase the price level.
• C)decrease real output and decrease the price level.
• D)decrease real output and increase the price level.
• E)increase real output and decrease the price level.

---

Definitions:

Inflation Rate

The rate at which prices for a wide range of goods and services go up, causing a decline in how much can be bought with the same amount of money.

Teddy Bears

Soft, plush toys in the form of bears, often given as a comfort object for children and as gifts of affection for holidays or special occasions.

Producer Price Index

An economic indicator that measures the average changes in prices received by domestic producers for their output, which is a signal of future consumer price movements.

Basket of Goods

A selected set of products and services used to track inflation and the cost of living through tools like the Consumer Price Index.