The economy is at full employment and then aggregate demand ...

[james0929]

The economy is at full employment and then aggregate demand increases. Describe what happens as an immediate result of the increase in aggregate demand. Describe how the economy adjusts back to full employment.
 
  What will be an ideal response?

Question 2

If you pay 35 for a sticker that entitles you to park on campus for 35 weeks of the academic year, the marginal dollar cost to you of parking your car on campus on any given weekday will be
 
  A) 35.
  B) 1.
  C) .20.
  D) zero.
  E) negative.

[aprice35067]

Answer to Question 1

The immediate effect of an increase in aggregate demand is to increase both the price level and real GDP. The money wage rate does not change, so with the higher price level the real wage rate falls. Eventually, however, workers demand a higher (money) wage rate to compensate for the higher price level. As firms pay the higher money wage rate, aggregate supply decreases. The decrease in aggregate supply means that the price level rises and real GDP decreases. Workers continue to demand a higher money wage rate and aggregate supply continues to decrease until finally the economy returns to full employment. At that point, the money wage rate has increased enough so that the real wage rate is back to its initial level. Real GDP once again equals potential GDP, so the changes in real GDP were only temporary. The price level, though, is higher than its initial level, so the increase in the price level is permanent.

Answer to Question 2

D

[james0929]

Correct answers!

[aprice35067]

Great! Please up vote