Question

2) Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run?

a. An increase in aggregate demand

. b. A decrease in aggregate supply, with no change in aggregate demand.

c. Equal increases in aggregate demand and aggregate supply.

d. A decrease in aggregate demand.

e. An increase in aggregate demand that exceeds an increase in aggregate supply.

Answer 1

a. An increase in aggregate demand - Price level rises rapidly and a small change in real output.

. b. A decrease in aggregate supply, with no change in aggregate demand.- Price level rises and real output decreases.

c. Equal increases in aggregate demand and aggregate supply.- Price level does not change, but real output increases.

d. A decrease in aggregate demand. - Price level does not change, but real output declines.

e. An increase in aggregate demand that exceeds an increase in aggregate supply. - Price level increases a little, as does real output.