Question

Suppose the current level of real GDP for an economy is below its potential level of RGDP. Starting with this situation, and in the absence of any government action, what should next happen in the AD-AS model?

Group of answer choices

A. A decrease in the Long-Run Aggregate Supply

B. An increase in Aggregate Demand

C. A decrease in Aggregate Demand

D. An increase in the Short-Run Aggregate Supply

E. An increase in the Long-Run Aggregate Supply

F. A decrease in the Short-Run Aggregate Supply

Suppose resource costs in an economy increase. What short-run effect will this have on prices and real GDP?

Group of answer choices

A. An increase in the price level, an increase in real GDP

B. A decrease in the price level, a decrease in real GDP

C. A decrease in the price level, an increase in real GDP

D. An increase in the price level, a decrease in real GDP

Answer 1

Answers:

1. C. A decrease in Aggregate Demand.

Government spending is one of the components of an aggregate demand. When there will be no government actions taken or no government spending done, there will be a decrease in the aggregate demand.

2. D. An increase in the price level, a decrease in real GDP.

When the resource costs increase, the price level will increase. The increase in the price level due to an increase in the input cost means that the same set of goods have become more expensive to produce now, so the producers will choose to produce less. This means that the real GDP has decreased.