Question

The short-run aggregate supply curve slopes upward because of the:  

Question 53 options:

	the catch-up effect
	wealth effect
	real exchange rate effect
	the sticky wage or sticky input price effect

Fill in the blanks of the following sentence. When financial markets are ________, leverage ________; when they are ________, leverage ________.

Question 59 options:

	booming; magnifies the losses; crashing; multiplies the gains
	crashing; mitigates the losses; booming; mitigates the gains
	None of these statements is true.
	booming; multiplies the gains; crashing; magnifies the losses

f the government decreases the income tax rate, it assumes that:

consumption spending will increase, shifting aggregate demand to the right.
	government spending will decrease in line with taxes.
	consumption spending will decrease, shifting aggregate demand to the right.
	investment spending will increase, which will increase the capital stock and shift short-run aggregate supply to the left.

Answer 1

The short-run aggregate supply curve slopes upward because of the:

the sticky wage or sticky input price effect.

Short run aggregate supply represents a relationship between price level and output supplied.

Sticky wage:

When the wage is sticky, and the price level falls, the employer will not be able to adjust the wages of the employees leading to increased nominal wage cost. Thus, he will hirer only few workers and produced fewer quantities of goods. Thus fall in price level leads to fewer quantities. The same is true for vice versa.

Sticky Input price:

When the price is sticky, and the actual price level fo the goods falls, the firm will not be able to adjust its price level immediately. This will lead to decrease in demand and sales will drop because of the sticky prices. This decrease in sales will result in derease in quantity supplied.

Thus, the short run aggregate supply curve in upward sloping beacuse of sticky wage or sticky price.

Firms take leverage for investment. If the investment decison is right, the leverage multiplies the gains and if the decison is wrong, then leverage magnifies the losses.

Hence whent the financial markets are booming, leverage multiplies the gains and when markets crashing, leverage magnifies the losses.

When the government decreases the tax rate, the disposable income in the hands of consumers increases. This leads to increased spending in the ecomony. This increase spending results in higher demand. Thus, consumption spending will increase, shifting aggregate demand to the right.