This Question: 2 pts 3 of 20 (0 complete) This Quiz: 40 pts possible Price level

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This Question: 2 pts 3 of 20 (0 complete) This Quiz: 40 pts possible Price level In the graph, the initial aggregate supply curve is As, and the initial aggregate demand curve is ADO. Some events that could have changed aggregate demand from AD, to AD,are AS A. an increase in transfer payments or a decrease in interest rates O B. a decrease in government expenditure or a decrease in foreign income O C. an increase in transfer payments or a decrease in government expenditure D. a decrease in government expenditure or a decrease in interest rates O E. a decrease in the money wage rate or 105 an increase in potential GDP 100 Following the change in aggregate demand, the new equilibrium is at OA. point OB, point B OC. point c O D. point D If potential GDP is $1 trillion, the economyh AD1 as | gap 0.7 0.9 Real GDP (trillions of 2009 dollars) a recessionary an inflationary no output Click to select your answer

Explanation / Answer

Ans:

1) Option A

a increase in transfer payments or a decrease in interest rate.

2) Point C, real GDP = $1.1 trillion , price level = 105

3) an inflationary gap.

Aggregate demand increases when the aggregate demand curve shifts from AD0 to AD1.Aggregate demand increases if expected future income increases,government cuts taxes,a increase in transfer payments,a decrease in interest rate. The equilibrium point is C and real GDP is $1.1 trillion and the price level is105. The economy is at above full-employment equilibrium, hence there is inflationary gap.

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