Economics Micro & Macro (CliffsAP)

2. The aggregate supply curve slopes upward as a result of which of the following?
   A. Increases in the price level lower demand.
   B. Decreases in the price level lower demand.
   C. Resource prices rise as real GDP expands toward and beyond full-employment.
   D. Inflation.
   E. Unemployment.


3. What effect can the government have on aggregate supply?
   A. It can change aggregate supply by making it illegal to sell certain products.
   B. It can change aggregate supply by increasing or decreasing subsidies.
   C. It has no effect on aggregate supply in a market economy.
   D. It can increase consumer spending.
   E. None of the above.

Mini-Review Answers

1. C.Real-balance, interest-rate, and foreign-purchases effects all have an impact on aggregate demand.


2. C.As demand for products rises, firms increase output until the economy has reached productive capacity.


3. B.The government can influence aggregate supply by increasing or decreasing subsidies. Subsidies can make
   production costs cheaper, thereby enabling firms to increase their supply.

Aggregate Supply and Demand: Equilibrium

When aggregate supply and demand come together, equilibrium outputis formed. The aggregate demand curve can
intersect the aggregate supply curve at any point in the three aggregate supply ranges. Depending on the point of inter-
section, the price level and output are influenced when aggregate supply and demand come together. Let’s see what
happens when aggregate supply and demand come together.

Figure 4-6 shows the aggregate demand curve intersecting the aggregate supply curve in range 1. The equilibrium
formed here represents no change in the price level because resources are still underemployed.

Figure 4-6

Price

Level

Output/GDP

AS

AD

Part II: Macroeconomics