Question

3 Part Question

Part 1 The short run aggregate supply is viewed as upward sloping:

a. showing that higher prices will lead to higher production.

b. because it takes a while for wages to rise when prices rise.

c. because it takes a while for wages to fall when prices fall.

d. in part, because of money illusion.

e. All of the above.

Part 2 When nominal wages adjust more slowly than changes in the price level, then the aggregate supply schedule is:

a. downward sloping.

b. upward sloping.

c. horizontal.

d. vertical.

e. shaped like a parabola.

Part 3 In the short run, an increase in the quantity of money results in:

a. a leftward shift of the aggregate demand schedule, a lower price level, and a higher real GDP.

b. a rightward shift of the aggregate demand schedule, a higher price level, and a higher real GDP.

c. a rightward shift of the aggregate supply schedule, a lower price level, and a higher real GDP.

d. a leftward shift of the aggregate demand schedule, a higher price level, and a lower real GDP.

e. shifts in both the curves leaving prices at a lower level.

Answer 1

1) option E. There are various reason for upward sloping supply function. It is true that when prices are increased quantity supplied by firms increases. However nominal wages are slow to change but prices are flexible due to which aggregate supply does not become vertical. Also note that there is a money illusion where workers consider change in prices as change in wages.

2) option B upward-sloping. It is mentioned in part 1

3) option B is correct. Higher money supply reduces interest rate and increase investment so that aggregate demand shifts to the right. As a result price level and output both are increased.