Question

As the level of real GDP increases, the short-run aggregate supply curve:

	a.	shifts to the right.
	b.	shifts to the left.
	c.	becomes flatter.
	d.	becomes steeper.
	e.	becomes horizontal to the real GDP axis.

Firms' profits or production do not increase in the long run because:

	a.	some factors of production are fixed in the long run.
	b.	all the factors of production are variable in the long run.
	c.	changes in factor costs completely offset any change in the price level.
	d.	there exists an excess capacity in the economy in the long run.
	e.	factor costs remain fixed in the long run.

What happens to aggregate supply when production costs adjust completely to price increases?

		a.	Both equilibrium output and prices increase
		b.	Only prices rise; equilibrium output remains fixed
		c.	Only equilibrium output rises; equilibrium prices remain fixed
		d.	Equilibrium output falls while prices rise
		e.	Both equilibrium output and prices remain fixed

Answer 1

1. The correct answer is a) shift to the right.

Because in the short run aggregate supply shifts to the right the price level decrease and the GDP increase.

2. The correct answer is b. All the factors of production are variable in the long run.

Because in the long run, there is not fixed cost, all factors are variable so it is impossible to do frequent changes in the factor of production to increase profit or production.

3. The correct answer is b. Only price rise; equilibrium output remain fixed.

Generally when price increase due to increase in production cost there is no change in equilibrium level of output because whole increase in the price is adjusted to cost of production.