Author Question: All of the following are assumptions made by the dynamic model of aggregate demand and aggregate ... (Read 107 times)

shenderson6 · **on:** Jun 29, 2018

All of the following are assumptions made by the dynamic model of aggregate demand and aggregate supply except

A) the short-run aggregate supply curve shifts to the right except during periods when workers and firms expect higher wages.
B) aggregate demand and potential real GDP decrease continuously.
C) potential real GDP increases continuously.
D) the aggregate demand curve shifts to the right during most periods.

Question 2

Use the graph above to answer the following question. Suppose that Jim is in casino in Las Vegas and wins a 60,000 jackpot.

The staff tells him that he can keep it or play one more game that will allow him to increase his jackpot earnings by an additional 20,000 . The game involves simply flipping a coin. If it turns up heads he earns the extra 20,000 . However, if it turns up tails he loses 20,000 of his 60,000 jackpot. Given the utility function above what is he likely to do and why?

mochi09 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

B

Answer to Question 2

The marginal utility of the extra 20,000 is only 1 if he wins. However, the marginal utility that he loses if it comes up tails is 3 . Therefore, Jim will simply take his 60,000 and refuse to play the second game.