C.An increase in technology lowers production costs for firms and allows firms to increase the production of
their good or service. Aggregate supply increases because of an increase in technology.
A.Consumer confidence will lead to an increase in aggregate demand because buyers will demand more
products. Increased demand shifts the aggregate demand curve to the right.
B.In range 1, total spending in the economy is low and unemployment is high. The economy is underemployed
in its resources, and firms have idle machines and equipment.
C.Full employment is when all resources are employed. Realistically, full employment for our economy is when
only 4–5 percent of the labor force is unemployed.
C.When aggregate supply and aggregate demand come together, it is called equilibrium GDP. Equilibrium GDP
is when the economy’s suppliers will provide goods and services at the same price level consumers in the
economy will purchase.
E.The interest-rate effect, real-balance effect, and foreign-purchases effect are reasons the aggregate demand
curve slopes downward.
D. When investment increases, real income increases. Real income is the total income (GDP) for the economy.
As spending increases, income increases as well.
C.The government can increase aggregate demand by spending more. When the government increases spending,
jobs are created and goods and services are demanded.
B.If the economy was performing at or near full employment in range 2 and total spending decreased, firms
would experience less demand and would therefore have to decrease resources costs (employment). The economy
would experience a decrease in aggregate demand, which would then translate into an increase in unemployment.
E.A change in consumer spending would cause aggregate demand to shift. Anytime spending decreases, the
likelihood of aggregate demand being affected increases.
A.Subsidies allow firms to decrease their production costs. When production costs fall, firms can increase
output, and this increases aggregate supply.
B.Low employment or high unemployment is present in range 1. Firms have idle machines and output in range 1.
When resources are underemployed, so is labor, so unemployment is high in this range.
A.Input costs are a determinant of aggregate supply. Aggregate supply is influenced by firms’ ability to create
output. If creating output becomes expensive for firms, suppliers will cut back on production, thereby influencing
aggregate supply.
Aggregate Expenditures, Aggregate Supply and Aggregate Demand Models