Question

In: Economics

Given a long-run aggregate supply curve, what would the aggregate demand curve illustrate? a. the price...

Given a long-run aggregate supply curve, what would the aggregate demand curve illustrate?

a.

the price level and the output level

b.

only the output level

c.

only the price level

d.

only the income level

Other things constant, how would a smaller marginal propensity to save affect the marginal propensity to consume?

a.

The marginal propensity to consume would be negative.

b.

The marginal propensity to consume would remain the same.

c.

The marginal propensity to consume would become larger.

d.

The marginal propensity to consume would become smaller.

Solutions

Expert Solution

A long run Aggregate supply curve fixes the output level. Aggregate Demand curve's position then determine only the price level.

Thus, given a long run Aggregate Supply Curve, the Aggregate Demand Curve would illustrate only the price level.

Thus, Option c is correct.

Marginal Propensity to Consume= 1–Marginal Propensity to Save.

As can be seen from the above mentioned equation, the smaller the Marginal Propensity to Save is, the larger will be the Marginal Propensity to Consume.

Thus, other things constant, a smaller Marginal Propensity to Save will make the Marginal Propensity to Consume larger.

Hence, Option c is correct.


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