An increase (shift right) in aggregate demand causes:
Answer(s): A
Choice "c" is correct. As shown above, an increase in aggregate demand causes the equilibrium price level to rise and equilibrium output (real GDP) to increase.Choice "a" is incorrect. As shown above, equilibrium output increases, not decreases. Choice "b" is incorrect. As shown above, the equilibrium price level increases, not decreases. Choice "d" is incorrect. As shown above, the equilibrium price level increases, not decreases.
The trough of a business cycle is generally characterized by:
Answer(s): C
Choice "c" is correct. The trough of a business cycle is an economic low point with no positive indicators for the future. It is characterized by unused productive capacity and an unwillingness to risk new investments.Choice "a" is incorrect. Shortages may occur during a peak.Choice "b" is incorrect. Increasing purchasing power and increasing capital investments come with recovery. Choice "d" is incorrect. Declining purchasing power comes with inflation; unlikely in a trough.
During a recession:
Choice "c" is correct. During a recession, potential output (real GDP) will exceed actual output (real GDP). Choice "a" is incorrect. Real GDP is falling during a recession.Choice "b" is incorrect. The natural rate of unemployment will not be affected by the various phases of the business cycle. Actual unemployment will change with the cycle.Choice "d" is incorrect. Actual output will not exceed potential output except at the peak of the cycle, and perhaps not then.
A recession can be caused by:
Answer(s): D
Choice "d" is correct. Both choices "b" and "c" can cause a recession. A recession is defined as a period of falling GDP and rising unemployment. GDP will fall if there is a decrease in aggregate demand or a decrease in aggregate supply.Choice "a" is incorrect. An increase in aggregate demand will cause GDP to increase NOT decrease. Choice "b" is incorrect, per the above Explanation.Choice "c" is incorrect, per the above Explanation.
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