Use the Following to Answer Questions

question 15

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. What happens in the new short run?

• A) Firms increase output because product prices rise while real wage falls.
• B) Firms increase output because product prices and real wage rise.
• C) Firms will have to pay higher nominal wages and employ more workers to supply the increased output.
• D) The price level increases to P_b, real wages, nominal wages, and employment increase.

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Definitions:

Pure Competition

A market structure characterized by a large number of small firms, identical products, and free entry and exit from the market.

Long-run Adjustments

Changes a firm or industry makes over a long period to adapt to changes in demand, technology, or other economic factors.

Allocative Efficiency

Occurs when resources are distributed in a way that maximizes the net benefit to society, with goods and services produced at the level where the last unit provides a benefit equal to its cost of production.

Purely Competitive Industry

An industry characterized by many sellers offering identical products where each seller is a price taker due to market forces.