Question

1. Which of following will shift the Investment demand curve to the right？（choose one or more）

A People believe the Economy will decline in the future

B.Business Tax Decline

C. The cost of buying production equipment Increases

D. Decrease is unsued Production Capacity

2. In the long run the aggregate supply curve is vertical and the economy is at full- employment.

A.True, in the long-run there is no cyclical unemployment which helps the economy maintain full employment.

B. False, the aggregate supply curve is only vertical in the short-run because of fixed contracts and menu pricing.

C. False, the aggregate supply curve can only be upward sloping or horizontal.

D.True, in the long-run prices and wages are flexible allowing the economy to adjust and be at full employment production Level.

3. The real balance effect contributes to the downward slope of the aggregate demand curve because

A.Declining price levels increase purchasing power. B.Rising price levels lead to dollar appreciation. C.Rising price levels increase total spending.

D.Declining price levels mean lower interest rates.

Answer 1

1.

B

D

Decrease in business tax is a supply side fiscal policy and it is going to increase the investment demand. Further, decrease in unused capacity, means firms have to plan for additional capacity and investment demand increases.

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2.

A

In the long run, there is natural rate of unemployment where the cyclical unemployment is zero. It means that economy is using its resources to the full capacity and potential output is achieved.

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3.

A

It is also shown by the wealth effect that when price decrease, then purchasing power increases, making people to demand more. So, AD curve is downward sloping.