Question

Which of the following will increase both the price level and real GDP?

Group of answer choices

A nationwide drought that drives up the prices of agricultural products

A reduction in government spending for goods and services

Greater optimism among business executives

The aggregate demand curve is

Group of answer choices

Downward sloping because a reduction in the price level leads to a lower interest rate, causing consumption and investment spending to increase

Downward sloping because a reduction in the price level leads to a higher interest rate, causing consumption and investment spending to increase

Upward sloping because as output is expanded shortages of resources are encountered which cause prices to rise

When inflation is steady and low, the rate at which prices rise is

Group of answer choices

difficult to predict

easy to predict

Answer 1

1.

Since AD= Consumption + planned real investment + government expenditure+ export- import

It means that aggregate demand is the total quantity of output demanded at alternative price level in a given time period.

When there is greater optimism among business executives, then investment spending will increase which leads to an increase AD, so AD curve shifts rightward from AD to AD1, so price level as well as real GDP both increases.

Hence option third is the correct answer.

2.

Aggregate demand means demand for a goods or services by all the people in the country. The graphical representation of the AD is aggregate demand curve.

AD= consumption + Investment + Government expenditure + export - Import

The AD is downward sloping because;

1. Rise in spending power. At a low price level, consumers real disposable income increases, so they like to spend more on the goods and services.
2. Increase in demand for exports. The lower price of the domestic goods leads to demand for the domestic goods by the foreigners, so the Export increases and so the production of goods will also increase in the domestic market. Hence the AD will be higher.
3. Lower interest rates. When the interest rate is low, then people prefer to hold more in the hand instead of keeping it into banks or bonds. So with more money in hand, People prefer to spend more on the goods and services and investment in plant and machine. Hence the Aggregate demand will be more with the lower interest rate and vice-versa.

The aggregate demand curve is downward sloping because a reduction in the price level leads to a lower interest rate, causing consumption and investment spending to increase

Hence option first is the correct answer.

3.

When inflation is steady and low, the rate at which prices rise is easy to predict. This is because inflation rate is steady which makes it easy to predict price rise.

Hence option second is the correct answer.