Assume That the AD Curve Is Held Constant and Short-Run

question 11

Multiple Choice

Assume that the AD curve is held constant and short-run aggregate supply decreases.The result is a(n) :

• A)increase in both equilibrium real GDP and the price level.
• B)decrease in equilibrium real GDP and an increase in the price level.
• C)decrease in both equilibrium real GDP and the price level.
• D)decrease in equilibrium real GDP, while the price level remains fixed.
• E)increase in the price level, while equilibrium real GDP remains fixed.

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Definitions:

Income Effect

The change in consumption that results from a change in real income (purchasing power), holding prices constant, reflecting how higher income increases consumption of goods while lower income reduces it.

Income Effect

The change in an individual's consumption choices resulting from a change in their real income.

Substitution Effect

The economic understanding that as prices rise (or incomes decrease), consumers will replace more expensive items with less costly alternatives.

Inferior Good

A type of good for which demand decreases when the income of the consumer increases, inversely related to normal goods.