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Chapter 19: Q1. (page 405)

If prices are sticky and the number of dollars of gross investment unexpectedly increases, the _________ curve will shift _________.

a. AD; right

b. AD; left

c. AS; right

d. AS; left

Short Answer

Expert verified

The correct option is (c): AS; right.

Step by step solution

01

Explanation for the correct option 

The gross investment affects the aggregate supply in the first place and not the aggregate demand. Hence, the AS curve will shift. The curve shifts rightward for the increase in AS and leftward for the decrease in AS. In the question, the increase in investment will allow the firms to expand their productive capacity. Hence, the aggregate supply will increase by shifting to the right.

02

Explanation for the incorrect options

The factor investment affects the aggregate supply and not the aggregate demand. Hence, options (a) and (b) are incorrect. Option (d) is incorrect because the decrease in AS will shift the AS leftward and not the increase.

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Most popular questions from this chapter

Use the equation of exchange to explain the rationale for a monetary rule. Why will such a rule run into trouble if V unexpectedly falls because of, say, a drop in investment spending by businesses?

If the money supply fell by 10 per cent, a monetarist would expect nominal GDP to __________.

a. rise

b. fall

c. stay the same

Place 鈥淢ON,鈥� 鈥淩ET,鈥� or 鈥淢AIN鈥� beside the statements that most closely reflect monetarist, rational expectations, or mainstream views, respectively:

a. Anticipated changes in aggregate demand affect only the price level; they have no effect on real output.

b. Downward wage inflexibility means that declines in aggregate demand can cause a long-lasting recession.

c. Changes in the money supply M increase PQ; at first only Q rises, because nominal wages are fixed, but once workers adapt their expectations to new realities, P rises and Q returns to its former level.

d. Fiscal and monetary policies smooth out the business cycle.

e. The Fed should increase the money supply at a fixed annual rate.

Suppose that the money supply and the nominal GDP for a hypothetical economy are \(96 billion and \)336 billion, respectively. What is the velocity of money? How will households and businesses react if the central bank reduces the money supply by $20 billion? By how much will nominal GDP have to fall to restore equilibrium, according to the monetarist perspective?

According to mainstream economists, what is the usual cause of macroeconomic instability? What role does the spending-income multiplier play in creating instability? How might adverse aggregate supply factors cause instability, according to mainstream economists?
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