If aggregate supply remains unchanged, a decrease in aggregate demand may a. cause demand-pull inflation. b,...

If aggregate supply remains unchanged, a decrease in aggregate demand may

a. cause demand-pull inflation.

b, move potential real GDP to the left.

c. put upward pressure on the price level.

d. cause a recession.

e. eliminate a recessionary GDP gap.

Solutions

Expert Solution

Since a recession is the time period of the economy in which the price level is quite low and the demand for goods and services is also very low. So the unemployment rate is very high, therefore the purchasing power is very low. Therefore there is a need for government intervention by increasing its expenditure and decreasing tax rate. So that aggregate demand could increase.

Since equilibrium is determined by the equality of aggregate demand and aggregate supply. So initial equilibrium price is P and quantity of real GDP is Yp that is potential real GDP. But when aggregate demand decreases, then the AD curve shifts leftward, so the price level decreases to P1 and real GDP decreases to Y1. Since aggregate demand has decreased and price level has decreased, so it is a situation of recession.

The potential real GDP remains same because there is no decrease in the production potential.

Hence option d is the correct answer.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Distinguish between demand-pull inflation and cost-push inflation and then use an AD-AS (aggregate demand/aggregate supply) model...

Distinguish between demand-pull inflation and cost-push inflation and then use an AD-AS (aggregate demand/aggregate supply) model to illustrate the theoretical effects of these two types of inflation on the price level (P), employment (L) and economic growth (real GDP) in the short run. Now identify the various factors that have contributed towards demand-pull inflation and cost-push inflation in South Africa and critically analyse whether they are consistent with the predictions of the AD-AS model.

Distinguish between demand-pull inflation and cost-push inflation and then use an AD-AS (aggregate demand/aggregate supply) model...

Distinguish between demand-pull inflation and cost-push inflation and then use an AD-AS (aggregate demand/aggregate supply) model to illustrate the theoretical effects of these two types of inflation on the price level (P), employment (L) and economics growth (real GDP) in the short run. Now identify the various factors that have contributed towards demand-pull inflation and cost-push inflation in South Africa and critically analyse whether they are consistent with the predictions of the AD-AS model

10. Use the model of aggregate demand and aggregate supply to show the differences between demand-pull...

10. Use the model of aggregate demand and aggregate supply to show the differences between demand-pull inflation and cost-push inflation.

If aggregate demand decreases and short run aggregate supply remains the same then what will happen...

If aggregate demand decreases and short run aggregate supply remains the same then what will happen to price levels? Group of answer choices A) Stay the same B) Increase C) Decrease D) Remain constant 2) If short run aggregate supply decreases and aggregate demand stays the same then what happens to price levels? Group of answer choices A) Increase B) Decrease C) Stay the same D) Remain constant 3) Which of the following best describes the economy during time of...

In the dynamic aggregate demand and aggregate supply model, the rate of inflation will increase if:...

In the dynamic aggregate demand and aggregate supply model, the rate of inflation will increase if: Select one: A. AD shifts to the right by more than the LRAS curve. B. If total production increases faster than total spending. C. SRAS and LRAS curves shifts to the right by the same magnitude. D. AD shifts to the right by less than the LRAS curve.

What is demand-pull inflation? Describe how a demand-pull inflation can occur.

1) For a fixed aggregate demand curve, an increase in long run aggregate supply will decrease...

1) For a fixed aggregate demand curve, an increase in long run aggregate supply will decrease prices. True False 2) An attempt to reduce current budget deficits could shift the aggregate demand curve left and cause a recession. True False 3) Contractionary fiscal policy is politically popular. False True 4) If aggregate demand increases for a given AS curve, prices will decrease False True 5) Republicans love using fiscal policy to stabilize the economy. False True

"Accoring to the Quantity Theory of Money, if the money supply remains unchanged, but the value...

"Accoring to the Quantity Theory of Money, if the money supply remains unchanged, but the value of transactions in an economy has increased, then" a.the velocity of money decreased b.the velocity of money increased c.the central bank shifted policy towards discount loans d.money demand decreased

b) State the direction of effect on aggregate demand or aggregate supply for each of the...

b) State the direction of effect on aggregate demand or aggregate supply for each of the following changes in the conditions: I. The price of crude oil drops significantly due to the application of a new extraction technology known as "fracking". (2.5 marks) II. A new strategic pact with a group of neighbouring nations is struck which the federal government judges will allow it to spend significantly less on defence for a few years. (2.5 marks) III. A severe recession...

What are some factors which would cause a shift in either aggregate supply or aggregate demand?...

What are some factors which would cause a shift in either aggregate supply or aggregate demand? If our oil suppliers suddenly stopped selling oil to the U.S., which curve would shift? What would then happen to our economy? Neat handwriting if written please.

Subjects