Question

1. Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run?

1. An increase in aggregate demand.

2. A decrease in aggregate supply, with no change in aggregate demand.

3. Equal increases in aggregate demand and aggregate supply.

4. A decrease in aggregate demand.

An increase in aggregate demand that exceeds an increase in aggregate supply

Answer 1

Answer :-

Here the two conditions are given that is

1. the price level is flexible upward but not downward
2. the economy is currently operating at its full-employment output

Also it is given that the all other things are equal, the affect on the equilibrium price level and equilibrium level of real output in the short run are discussed below,

(a) An increase in aggregate demand:

An increase in aggregate demand will cause a rapid rise in price level and there will be a little in real output.

(b) A decrease in aggregate supply, with no change in aggregate demand:

A decrease in the aggregate supply while keeping the aggregate demand in no change condition will cause to be a increase in price level, whereas there will be a decrease in real output.

(c) Equal increases in aggregate demand and aggregate supply:

An equal increases in aggregate demand and aggregate supply will cause to be a no change in the price level, but real output will increase.

(d) A decrease in aggregate demand

A decrease in aggregate demand will not cause any change in price level but real output will decrease.

(e) An increase in aggregate demand that exceeds an increase in aggregate supply:

An increase in aggregate demand that exceeds an increase in aggregate supply will increase the price level by some amount relative to the large change in real output.