Figure 16-2

question 154

Multiple Choice

Figure 16-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.

-Refer to Figure 16-2. Assume the money market is always in equilibrium, and suppose r₁ = 0.08; r₂ = 0.12; Y₁ = 13,000; Y₂ = 10,000; P₁ = 1.0; and P₂ = 1.2. Which of the following statements is correct? When P = P₂,

• A) investment is lower than it is when P = P₁.
• B) nominal output is higher than it is when P = P_1.
• C) the expected rate of inflation is higher than it is when P = P₁.
• D) the velocity of money is higher than it is when P = P₁.

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Definitions:

Economic Profit

Profit calculated by subtracting both explicit and implicit costs from total revenues, capturing the true profitability of a venture.

Market Price

The current value at which an asset or service can be bought or sold in a competitive marketplace.

Units

Basic measurements or quantities adopted as standards to express amounts, dimensions, or capacities for various elements or substances in specific contexts.

Marginal Cost

The price rise from the production of an additional unit of a product or service.