Question

True or False: Indicate whether the following questions are true or false and then EXPLAIN why.

1. An increase in price expectations shifts the long-run aggregate supply curve to the left.

2. All explanations for the upward slope of the short-run aggregate supply curve suppose that the quantity of output supplied increases when the actual price level exceeds the price level that was expected.

3. One reason the Aggregate Demand curve slopes downward is the real wealth effect: a decrease in the price level increases the value of money holdings and consumer spending rises.

Answer 1

1. False

Long run aggregate supply shows the potential of the economy to produce at full employment which is not affected by Price expectations.

2. False

Short run aggregate supply shows the positive relationship between price and output. There are two main reasons behind upward sloping supply curve. First wages are fixed in short run and increasing prices to produce more increases profit. The other is higher cost is incurred to produce more and for that higher price is charged.

3. True

Lower price increases the real value of money as less of money is need to buy the same unit of the good. This increases consumption spending and quantity demanded.