Question

6. Which set of changes is definitely predicted to lower Real GDP in the short run? a. The money supply falls and labor productivity rises. b. The U.S. dollar appreciates and wage rates fall. c. The U.S. dollar depreciates and the government passes a law making it easier for entrepreneurs to make a profit. d. Foreign real national income falls and the economy experiences an adverse supply shock. 7. Which set of changes will definitely shift the aggregate demand (AD) curve to the right? a. Business taxes decline and foreign real national income rises. b. Businesses become pessimistic about future sales and the U.S. dollar depreciates. c. Wealth decreases and individuals expect higher (future) incomes. 8. Which of the following statements is false? a. If AD rises and SRAS is constant, the price level rises in the short run. b. If both SRAS and AD decline, Real GDP falls in the short run. c. If both AD and SRAS increase, the price level rises in the short run. d. none of the above

Answer 1

6) A fall in foreign real national income will shift the Aggregate demand curve to the left and an adverse supply shock will shift the aggregate supply curve to the left and thus the combined effect of the two will lower real GDP.

The correct option is, d) Foreign real national income falls and the economy experiences an adverse supply shock.

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7) A decline in business taxes will encourage business to invest more thus shifting the AD curve to the right and a rise in foreign real national income also shifts the AD curve to the right.

The correct option is, a) Business taxes decline and foreign real national income rises.

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8) When both the AD and SRAS increases there is an increase in real GDP but the effect on price is uncertain. The price level may increase, decrease or stay the same. The effect on the price level depends on the intensity of shift of the two curves.

The correct option is, c) If both AD and SRAS increase, the price level rises in the short run.