Consider the Basic AD/AS Model

question 108

Multiple Choice

Consider the basic AD/AS model. Suppose that a rising percentage of high- school graduates are illiterate, resulting in a decrease in average labour productivity. This change will

• A)shift the AD curve to the right.
• B)shift the AS curve to the right.
• C)shift the AS curve to the left.
• D)shift the AD curve to the left.
• E)cause a movement to the right along the AS curve.

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Definitions:

Fixed Costs

Expenses that do not change with the level of goods or services produced by a business, such as rent, salaries, and insurance.

Margin of Safety

The difference between actual sales and the break-even point, which measures the cushion that a business has to withstand a sales downturn.

Sales Revenue

The total amount of money generated from sales of goods or services before any expenses are subtracted.

Operating Leverage

A measure of how revenue growth translates into growth in operational income, highlighting the impact of fixed costs on profits.