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Chapter 8: Problem 17

A change in the price level affects which of the following? a. The quantity demanded of Real GDP b. Aggregate demand c. Short-run aggregate supply d. The quantity supplied of Real GDP

Short Answer

Expert verified
A change in the price level affects both the quantity supplied of Real GDP and the short-run aggregate supply.

Step by step solution

01

Understand the Concepts Involved

First, it’s important to understand what each of the terms in the options mean. Real GDP is a measure of the value of all goods and services produced by an economy, adjusted for inflation. Aggregate demand is the total demand for goods and services within an economy. Aggregate supply represents the total supply of goods and services in an economy. Meanwhile, the price level is a measure of the average prices of goods and services in the economy.
02

Determine the Impact of Price Changes

Next, consider how changes in the price level would affect each of these concepts. A change in the price level would not affect the quantity demanded of Real GDP because Real GDP is a measure of the physical volume of the economy's output; it does not depend on price levels. Similarly, aggregate demand is a schedule that shows the quantities of Real GDP that buyers collectively desire to purchase at each possible price level. Therefore, a change in the price level moves us along the aggregate supply curve, changing the quantity of goods and services supplied, but it does not shift the curve. Thus, it does not affect aggregate demand.
03

Finalize Your Answer

The correct answer is that a change in the price level affects the quantity supplied of Real GDP. When the price level rises, suppliers are willing to produce and sell more goods and services, and when the price level falls, they are willing to produce and sell fewer. Therefore, the price level does affect the quantity supplied of real GDP. It also affects short-run aggregate supply because in the short run, firms will supply more if the price level increases.

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Most popular questions from this chapter

Will a direct increase in the price of U.S. goods relative to foreign goods lead to a change in the quantity demanded of Real GDP or to a change in aggregate demand? Will a change in the exchange rate that subsequently increases the price of U.S. goods relative to foreign goods lead to a change in the quantity demanded of Real GDP or to a change in aggregate demand? Explain your answers.

Explain how expectations about future sales will affect investment.

There is a difference between a change in the interest rate that is brought about by a change in the price level and a change in the interest rate that is brought about by a change in some factor other than the price level. The first will change the quantity demanded of Real GDP, and the second will change the \(A D\) curve. Do you agree or disagree with this statement? Explain your answer.

Explain what is likely to happen to U.S. export and import spending as a result of the dollar depreciating in value.

An economist is sitting in the Oval Office of the White House, across the desk from the president of the United States. The president asks, "How does the unemployment rate look for the next quarter?" The economist answers, "It's not good. I don't think Real GDP is going to be as high as we initially thought. The problem seems to be foreign income; it's just not growing at the rate we thought it was going to grow." How can foreign income affect U.S. Real GDP?
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