Describe what effect each of the following would likely have on the short- run p
ID: 1115225 • Letter: D
Question
Describe what effect each of the following would likely have on the short- run price level and real output (increase/decrease) in the U.S.. Explain your logic. (assume long-run equilibrium exists prior to these events) Your answers should be in the form, for example,-#1 Price level rises; output rises because of unplanned decreases in business inventories. 1. aggregate demand change increases; short-run aggregate supply - no 2. aggregate demand - no change; short-run aggregate supply- increases 3. aggregate demand decreases; short-run aggregate supply no change 4. aggregate demand decreases no change; short-run aggregate supply 5. Value of dollar depreciates worldwide 6. Interest rates increase 7. Tax code is changed to create more deductions which reduces household taxable income 8. Military spending is decreased by 25% (no increases in other areas) 9. Consumer/Business confidence improves dramatically upon the election of President Jeff Caldwell 10. The price of gasoline decreases drastically.Explanation / Answer
Answer : 1. Price level rises; output rises because of aggregate demand increase. As demand increases, output increases because of excessive demand in the market firm increase it's production.
2. Price falls; output increases because of aggregate supply increase. As supply increases, price falls if demand remain unchanged.
3. Price falls; output decrease because of aggregate demand decrease. As demand decrease, price fall and automatically output decrease because firm reduce it's production.
4. Price rises; output decreases because of aggregate supply decrease in the market. If supply decrease then price rise because of excessive demand in the market.