Question

1. Aggregate demand shifts right if at a given price level a. taxes fall and shifts...

1. Aggregate demand shifts right if at a given price level

a.

taxes fall and shifts right if the money supply increases.
b.

taxes rise and shifts right if the money supply increases.
c.

taxes rise and shifts left if the money supply increases.
d.

taxes fall and shifts left if the money supply increases.

2. Which of the following can explain the economic growth and inflation over the last 20 years.

a.

Shift in SRAS to the right due to the better technology and shift in AD to the left due to the pessimism.
b.

Shift in LRAS to the right due to the better technology and shift in AD to the right due to the increasing money supply.
c.

Shift in AD to the left after financial crisis and shift in SRAS to the right due to increasing money supply.
d.

Shift in LRAS to the left due to higher oil price and shift in AD to the right due to increasing money supply.
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Answer #1

1.

Answer: a

Aggregate demand (AD) for a closed economy is the sum total of consumption expenses (C), investment spending (I), and government spending (G); [AD = C + I + G]. The curve is downward slopping from left to right, since it has the inverse relationship with the price level. Reduction of taxes increases the purchasing power of people, although the price remains the same; it increases the money supply in the market, which tends to shift the curve to the right.

2.

Answer: d

AD indicates economic growth; if it shifts to the right there is a economic growth. At the same time the long run aggregate supply curve (LRAS) shifts left, which means lower supply to fulfill the additional demand; it creates inflation, since demand is higher than supply.

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