Exhibit 17-2 Aggregate Demand and Aggregate Supply Curves as Shown

question 66

Multiple Choice

Exhibit 17-2 Aggregate demand and aggregate supply curves As shown in Exhibit 17-2, if people behave according to rational expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the price level to move:

• A)directly from 100 to 105 and then remain at 105.
• B)directly from 100 to 110 and then remain at 110.
• C)from 100 to 105 initially and then eventually move back to 100.
• D)from 100 to 105 initially and then eventually move to 110.

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Definitions:

Variable Expenses

Costs that vary in direct proportion to changes in an organization's activity level or volume of output.

Operating Leverage

A measure of how sensitive net operating income is to a given percentage change in dollar sales.

Net Income

The total profit of a company after all expenses and taxes have been subtracted from total revenue.

Contribution Margin

The difference between sales revenue and variable costs, indicating the contribution of sales to fixed costs and profits.