Question

The short-run aggregate supply curve shows:

a. What happens to output in an economy as the actual price level changes, holding all other determinants of real GDP constant

b. How firms respond to changes in interest rates

c. The relationship between the price level and aggregate expenditure

d. What happens to output in an economy when the government spends more money

Which of the following are assumed to remain unchanged along a given short-run aggregate supply curve? Check all that apply.

- Institutions, such as patent laws and tax systems, that make up the "rules of the game"

- Input prices

- The technology available to firms

- The price level

The term potential output refers to:

a. The quantity of output produced at the intersection of the AD and AS curves

b. The maximum possible output for an economy

c. The quantity of output produced when the price level is the same as firms and workers expected when they agreed on input prices and wages

d. The quantity of output that would be produced if every member of the labor force worked 40 hours per week

Answer 1

The short run aggregate supply curve shows:
Answer: What happens to output in an economy as the actual price level changes, holding all other determinants of real GDP constant.
Reason: The short run aggregate supply curve depicts the short run relationship between the output and how firms respond to changes in price level, keeping other determinants constant. Firms usually react to high price level by increasing output.

Which of the following assumed to be unchanged along a given short run aggregate supply curve?
Answer: Institutions such as patent laws and tax system that make up the rules of the game.
technology
input prices.
Reason: Short run being a small span of period. Changes in rules of game, technology and factor prices especially (which are downward sticky) can't be made in short time and hence remain unchanged.

The term potential output refers to:
Answer: The maximum possible output for an economy
Reason: Potential output refers to the amount of output that an economy can produce utilising its full capacity.