The short run aggregate supply curve assumes that firms adjust__________________

Question

The short run aggregate supply curve assumes that firms adjust__________________________________________, given a shift in aggregate demand:

Let's say that England's Prime Minister wanted to increase her/his country's income say by $2,000. Their finance minister tells them that the mpe is 0.95. The government should increase its spending by:

The SAS Curve shifts down and to the right when a significant number of firms:

If autonomous expenditures are $1,000, income is $4,000, and the marginal propensity to expend is 0.75, then total aggregate expenditures would be:

If productivity increases by 4% but wages increase by 2%, then it is most likely that:

A. both prices and quantities in the short run B. prices but not quantities in the short run C. quantities but not prices in the short run D. neither prices nor quantities in the short run

Explanation / Answer

(1) (A)

As aggregate demand changes, both price and quantity changes in short run.

(2) (A)

Multiplier = 1 / (1 - mpe) = 1 / (1 - 0.95) = 1 / 0.05 = 20

Increase in spending = Increase in income / Multiplier = $2000 / 20 = $100

(3) (C)

When many firms increase their quantity supplied, aggregate supply rises, shifting SAS curve rightward.

(4) (B)

Aggregate Expenditure = 1,000 + 0.75 x 4,000 = 1,000 + 3,000 = 4,000

(5) (B)

If increase in productivity is higher than increase in wage, aggregate supply will rise, shifting SAS curve rightward and down.

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