Question

If real GDP is above its potential, then according to the classical theory

	workers and businesses will agree to lower wages. In response to the lower wages firms will produce less at any given price level.
	workers and businesses will agree to lower wages. In response to the lower wages firms will produce more at any given price level.
	workers and businesses will agree to higher wages. In response to the higher wages firms will produce less at any given price level.
	workers and businesses will agree to higher wages. In response to the higher wages firms will produce more at any given price level.

2.

Which of the following shifts aggregate demand right?

	an appreciation of the currency and the implementation of an investment tax credit
	depreciation of the currency but not the implementation of an investment tax credit
	the implementation of an investment tax credit but not appreciation of the currency
	neither depreciation of the currency nor the implementation of an investment tax credit

3.

When the LRAS curve shifts left but AD remains constant, the price level

	and output both increase.
	and output both decrease.
	increase and output decreases.
	decrease and output increases.

Answer 1

1) workers and businesses will agree to higher wages. In response to the higher wages firms will produce less at any given price level. (Expansionary fiscal gap would lead to higher aggregate price level, this pushes up the wages and production costs, supply at a given price level reduces)

2)

the implementation of an investment tax credit but not appreciation of the currency (investment tax credit boosts investment , an essential component of aggregate demand while appreciation of currency encourages imports which decreases net exports, also a component of aggregate demand)

3)

The price level increases and output decreases (LRAS defines the potential output level, left shift would decrease output. Price level would increase as demand remains the same and the new supply cannot meet the demand at the given price level i.e. there exists a shortage)