Suppose the economy is operating in long-run equilibrium and a positive demand shock hits. We expect...

Suppose the economy is operating in long-run equilibrium and a positive demand shock hits. We expect a short-run increase in real GDP and the price level and a long-run _____ in real GDP (in comparison to the then short run GDP) and _____ the price level (in comparison to the then short run price level).

	increase; decrease
	decrease; increase
	increase; increase
	decrease; decrease

Changes in aggregate demand can be caused by changes in:

	business costs.
	raw materials costs.
	the expenses of complying with government regulations.
	the stock of physical capital.

An inflationary gap will be eliminated because there is _____ pressure on wages, shifting the _____.

	downward; long-run aggregate supply curve to the left
	upward; short-run aggregate supply curve to the left
	downward; long-run aggregate supply curve to the right
	downward; aggregate demand curve to the left

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:

	LRAS and aggregate demand.
	SRAS and aggregate demand.
	potential output and LRAS.
	LRAS and SRAS.

Expert Solution

1) decrease, increase

Explanation: A positive demand shock creates sudden increase in demand which leads to increase in real GDP in short run but decrease in real GDP in long run.

2) Stock of physical capital

Explanation: Change in stock of physical capital causes change in total consumer spending. Change in consumer spending causes change in agreegate demand.

3) upward, short run aggregate supply curve to the left

Explanation: The inflationary gap is eliminated due to increase in savings so that aggregate demand can be reduced which shifts short run aggregate supply curve to the left putting pressure on GDP to fall.

4) SRAS and aggregate demand.

Explanation: Short run equilibrium is the intersection of AD & SRAS. When price rise real GDP rises. Aggregate demand curve shifts to right putting pressure on price level to fall.

Rahul Sunny answered 2 years ago

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