Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point W. The price level is Po. Now, suppose there is an exogenous fall in the price level to P₂. Which of the following statements describes the likely macroeconomic effects? OA. The AE curve shifts to AE₁, a new equilibrium is established at point V, and the AD curve shifts from AD to AD¹, and equilibrium moves from point B to point D. OB. The AE curve shifts to AE2, a new equilibrium is established at point U, and the AD curve shifts from AD to AD¹, and equilibrium from point B to point D. OC. The AE curve shifts to AE2, a new equilibrium is established at point U, and the economy moves from point B to point C along AD. O D. The AE curve shifts to AE₁, a new equilibrium is established at point V, and the economy moves from point B to point C along AD. Desired Aggregate Expenditure Price Level Y₁ W_ AE=Y AE₂ AEo AE₁ Yo Y₂ Real GDP Real GDP Q U Q Q

MACROECONOMICS
14th Edition
ISBN:9781337794985
Author:Baumol
Publisher:Baumol
Chapter11: Managing Aggregate Demand: Fiscal Policy
Section: Chapter Questions
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Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point W. The price
level is Po. Now, suppose there is an exogenous fall in the price level to P2. Which of the following statements describes
the likely macroeconomic effects?
O A. The AE curve shifts to AE₁, a new equilibrium is established at point V, and the AD curve shifts from AD to
AD¹, and equilibrium moves from point B to point D.
OB. The AE curve shifts to AE2, a new equilibrium is established at point U, and the AD curve shifts from AD to
AD¹, and equilibrium from point B to point D.
Ⓒ C. The AE curve shifts to AE2, a new equilibrium is established at point U, and the economy moves from point B to
point C along AD.
O D. The AE curve shifts to AE₁, new equilibrium is established at point V, and the economy moves from point B to
point C along AD⁰.
Desired Aggregate Expenditure
Price Level
759²
Y₁
W
Yo Y₂
Real GDP
AE=Y
AE₂
Real GDP
AEo
AE₁
Q
✔
Q
Transcribed Image Text:Assume the economy is initially in equilibrium with desired aggregate expenditure equal to real GDP at point W. The price level is Po. Now, suppose there is an exogenous fall in the price level to P2. Which of the following statements describes the likely macroeconomic effects? O A. The AE curve shifts to AE₁, a new equilibrium is established at point V, and the AD curve shifts from AD to AD¹, and equilibrium moves from point B to point D. OB. The AE curve shifts to AE2, a new equilibrium is established at point U, and the AD curve shifts from AD to AD¹, and equilibrium from point B to point D. Ⓒ C. The AE curve shifts to AE2, a new equilibrium is established at point U, and the economy moves from point B to point C along AD. O D. The AE curve shifts to AE₁, new equilibrium is established at point V, and the economy moves from point B to point C along AD⁰. Desired Aggregate Expenditure Price Level 759² Y₁ W Yo Y₂ Real GDP AE=Y AE₂ Real GDP AEo AE₁ Q ✔ Q
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