Question

In: Economics

7. Which one of the following would shift the long-run aggregate supply curve to the right?...

7. Which one of the following would shift the long-run aggregate supply curve to the right?
(a) increased international trade
(b) an increase in the price level
(c) a reduction in immigration
(d) an increase in government spending
(e) a higher minimum wage


8. To explain the long-run trend of rising output and prices observed in the U.S. :
(a) the LRAS must increase over time, while the AD must remain constant.
(b) the LRAS must remain constant over time, while the AD must increase.
(c) both the LRAS and AD must be increasing over time.
(d) the LRAS must increase over time, while the AD must decrease.
(e) none of the above.


9. Which one of the following alternatives explains the negative slope of the AD:
(a) the wealth effect.
(b) the misperception theory.
(c) the classical view of economics.
(d) sticky wages.
(e) sticky prices.


10. If the actual price level turns out to be higher than the expected price level
(a) firms reduce their output supplied according to the sticky-price theory.
(b) the SRAS shifts to the right to offset the high prices.
(c) firms with sticky wages become less profitable.
(d) inflation had to be lower than previously expected.
(e) the LRAS shifts to the left.
(f) firms increase the quantity of output supplied according to the sticky-wages theory.

Solutions

Expert Solution

Answer 7: The correct option is " increase in government spending"(Option d) .

Explanation: Any factor that increases the full-employment(FE) level of output, shifts the long-run aggregate supply curve(LRAS) to the right.Thus any change that shifts the FE line to the right in IS-LM diagram also shifts the LRAS curve to right.

Here the factor is increase in government spending which shifts the IS to right and it causes the shift of FE line to right.And all this leads the LRAS to right.

Answer 8: The correct option is "both the LRAS and AD must be increasing over time"(Option c).

Explanation:From the above mentioned image it can be seen that output and price can show the trend of rising only when both the AD and LRAS is increasing over time.Now consider two situations First, if the AD is fixed over time and LRAS is increasing then the output is increasing but the price level is decreasing .Second, if the LRAS is fixed over time and AD is increasing then the output will be fixed but the price level is increasing . Hence output and price can show the trend of rising when both the AD and LRAS is increasing.

Answer 9: The correct option is "the wealth effect".

Explanation: The reason for the downward slope of the aggregate demand curve is Pigou's wealth effect.Thus, a decrease in the price level induces consumers to spend more, thereby increasing the aggregate demand.

Answer 10: The correct option is "firms increase the quantity of output supplied according to the sticky-wages theory".

Explanation: Due to the increased price level, produces hire more workers to produce more output.

Rahul Sunny answered 2 years ago
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