Question

According to the real balances effect, as the price level in the U.S. falls,

a. Aggregate quantity demanded increases because lower price levels lead to lower interest rates, which stimulates spending.

b. The entire aggregate demand curve will shift to the right.

c. Aggregate quantity demanded increases because lower price levels cause the purchasing power of the dollar to increase.

d. Aggregate quantity demanded increases because U.S. consumers tend to buy more domestically-produced goods/services and fewer imports.

e. Answers b). and c). above.

and

An increase in aggregate supply (AS) will result in

a. Cost-push inflation.

b. The contraction phase of a business cycle.

c. The expansion phase of a business cycle.

d. Answers a). and b). above.

e. Answers a). and c). above.

Answer 1

Q. According to the real balances effect, as the price level in the U.S. falls,

c. Aggregate quantity demanded increases because lower price levels cause the purchasing power of the dollar to increase.

Explanation:

Price level and aggregate demand have an inverse relationship. Lower price levels increase the purchasing power of the dollar. Every dollar can now purchase more goods and services. This causes a movement along the AD curve, towards a higher quantity demanded.

Q. An increase in aggregate supply (AS) will result in

c. The expansion phase of a business cycle.

Explanation:

When the business cycle begins to recover, and expansion takes place, firms begin to produce more and supply more. This leads to more output, and thus growth in GDP.