Suppose That Aggregate Demand Were Suddenly to Shrink by 5

question 70

Multiple Choice

Suppose that aggregate demand were suddenly to shrink by 5 percent because of a crisis affecting exports. You would expect, in the absence of any policy adjustment,

• A) that employment would climb above full employment briefly but fall back in the long run as prices rose.
• B) a period of increased unemployment in the short run that would be reversed in the long run by a reduction in inflation and prices, for which aggregate demand could again equal potential GDP.
• C) no change in employment or prices, because the aggregate demand curve would still intersect aggregate supply above potential GDP.
• D) some type of price adjustment in the export market that would cancel the export contraction.
• E) none of the above.

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Definitions:

Profit Or Loss Test

A method used to assess the financial performance of a company by determining whether it has made a profit or incurred a loss over a certain period.

Separately Reportable

Criteria under which certain activities or financial results must be disclosed individually due to their significance within financial statements or to regulatory bodies.

Industry Segments

Specific categories within an industry that companies can be classified under based on their main business activities.

Revenue Test

A criterion used to determine whether a business segment's revenue is sufficient for it to be considered a reportable segment under financial reporting standards.