Refer to the Graph Above

question 22

Multiple Choice

Refer to the graph above. Assume that the economy is initially in equilibrium at the intersection of AD₁ and AS₁. Suppose that there is economic growth which shifts AS₁ to AS₂. Mainstream economists would suggest that the application of a monetary rule to keep prices constant might produce demand-pull inflation because the investment spending might:

• A) Increase and cause the aggregate demand curve to shift from AD₁ to AD₄
• B) Decrease and cause the investment demand curve to shift from AD₁ to AD₄
• C) Increase and cause the aggregate demand curve to shift from AD₁ to AD₂
• D) Decrease and cause the investment demand curve to shift from AD₁ to AD₂

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Definitions:

Perfectly Elastic

A situation in economics where the quantity demanded or supplied changes by an infinite amount in response to any change in price; highly responsive.

Profit-Maximizing

A company's strategy aimed at adjusting their level of output to generate the highest possible profit.

Demand Schedule

A table that lists the quantity of a good that consumers are willing and able to purchase at different prices over a specified period of time.

Total Cost

The complete amount of expenses incurred by a business in the production of goods or services, including both fixed and variable costs.