Question

1. Which is not part of the story of downward demand-pull deflation?

A) consumers have less income to spend

B) demand for output decreases relative to supply

C) businesses face shortages of inputs

D) businesses have unsold products and services

E) workers have difficulty getting raises

2. Which is not part of the story of downward demand-pull deflation?

A) consumers have less income to spend

B) demand for output decreases relative to supply

C) businesses face shortages of inputs

D) businesses have unsold products and services

E) workers have difficulty getting raises

3. Short-run aggregate supply increases if

A) the price level falls.

B) prices for resource inputs fall.

C) prices for resource inputs rise.

D) the price level rises.

E) government transfer payments decrease.

4. Which does not change Canada's short-run aggregate supply?

A) Prince Edward Island is submerged by an offshore earthquake.

B) Perfect weather all across Canada improves crop yields for all farmers.

C) People around the country upgrade their human capital by reading Economics for Life.

D) The Government of Canada passes new regulations reducing the imports of advanced Japanese robots by Canadian businesses.

E) American consumers stop buying Canadian beef during an outbreak of Mad Cow Disease.

Answer 1

Ans-1) (C) Business face shortage of inputs.

Explanation-: Demand pull deflation is caused due to fall in prices owin to demand side factors i.e. decrease in demand , fall in purchasing power etc . Weak demand forces pull the prices down .

• consumers have less income to spend -: It is a demand side factor as less consumer income would mean decrease in Aggregate demand , thereby pulling the prices down. So it is a story of demand pull deflation.

• demand for output decreases relative to supply-: It is also a demand side factor which decreases the demand and pulls the price downwards. So it is a story of demand pull deflation.

• businesses face shortages of inputs -: Shortage of input always means a disruption on the supply side. This shortage of input will make the production difficult and will result in higher prices i.e. cost push inflation. So it is not a story of demand pull deflation.

• businesses have unsold products and services-: Unsold products are left due to decrease or lack of demand . This will also pull down the prices due to less demand.So it is a story of demand pull deflation.  

• workers have difficulty getting raises: Difficulty getting a raise woul decrease the purchasing power which will decrease the demand and will pull the prices. So it is a story of demand pull deflation.

Anas - 2) Same as above .

Ans-3) (B) Prices of resource inputs fall .

Explanation -: The shifts in short run aggregate supply curve are due to events like change in technology , change in input prices , change in wages etc. If the price of resource inputs fall , it decreases the cost of production and the short run aggregate supply increases as now more can be supplied at lower prices.

Decrease in govt transfer payments , rise in prices , rise in price of inputs will shift the short run aggregate supply curve leftwards i.e. will decrease the short run aggregate supply curve.

Ans-4(C) People around the country upgrade their human capital by reading Economics for Life.

Explanation -: Upgrade in human capital is more liekly to shift long run aggregate supply curve rather than the short run aggregate supply curve .

• Prince Edward Island is submerged by an offshore earthquake-: Decrease the Short run Aggregate supply curve (SRAS).

• Perfect weather all across Canada improves crop yields for all farmers.: INCREASE SRAS.

• The Government of Canada passes new regulations reducing the imports of advanced Japanese robots by Canadian businesses.: increase the Domestic SRAS curve because less will be imported from outsie and more will be produced in domestic economy.

• American consumers stop buying Canadian beef during an outbreak of Mad Cow Disease: Will have to Decrease SRAS in response to decrease in demand.