Question

Please answer with true and false answers, but use your explanations why it would true or false and use diagrams if necessary.

5. Suppose firms see inventories levels fall below the levels they had planned. This will cause aggregate output to increase.

6. Ceteris paribus, an increase in the domestic price level increases the price of domestic goods increases relative to foreign goods resulting in a downward shift of aggregate expenditures and a leftward shift of the aggregate demand curve.

7. An economy with only price taking firms will have a horizontal short-run aggregate supply curve.

8. A given increase in aggregate demand has a larger effect on national income the less steeply do unit costs rise with increases in production.

Answer 1

1) "True"

A fall in the level of inventory can be a result of increased aggregate demand. And to match the inventory level again (meet the increased demand) the output has to be increased.

2) "False"

An increase in the price of the goods will not cause the demand curve to shift to the left it will cause movement along the demand curve but it will shift the AE curve downward. (leftward shift of demand curve means less demand at the given price but here the price has risen decreasing the quantity demanded at a higher price. it will not shift the demand curve)

3) "False"

The short-run aggregate supply curve will be upward sloping indicating that the firms can increase the supply of the good with an increase in the price. A horizontal supply curve means no increase in the quantity with an increase in the price of goods which is wrong.

4) "True"

If the unit cost of production rises slowly i.e. a small increase in the income will cause a huge change in the demand for the good. This will cause a large effect on the national income. the supply curve in such case will be highly elastic showing a small increase in income i.e. demand will cause a huge change in the quantity demanded. A steep slope means a high change in demand will cause a little change in quantity demanded and less change in the national income.