Exhibit 10-8 Aggregate Demand and Supply

question 16

Multiple Choice

Exhibit 10-8 Aggregate demand and supply

In Exhibit 10-8, if aggregate demand shifts from AD₁ to AD₃,

• A) real GDP will increase from $3.0 to $4.0, and the price level will increase from 100 to 140.
• B) real GDP will increase from $3.0 to $7.0, and the price level will increase from 100 to 140.
• C) real GDP will increase from $3.0 to $4.0, and the price level does not change.
• D) real GDP will increase from $3.0 to $7.0, and the price level will increase from 100 to 120.

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Definitions:

Inflationary Gap

The difference between the actual level of GDP and the potential GDP under full employment, indicating excess demand in the economy.

Government Spending

Total government expenditures on final goods and services, including salaries of public servants, public infrastructure, and other government activities.

Multiplier

A quantitative measure that indicates the proportional amount by which aggregate output is expected to increase following an injection of public spending or investment.

Multiplier

A factor by which an initial change in spending will alter total economic output by a greater amount.