C6 An increase in aggregate demand when the economy is operating atnear full capacity is likely to result in:An increase in both output and the overall price level.An increase in output but no increase in the overall price level.An increase in the overall price level but no increase in output.No increase in either output or the overall price level. Aggregate Demand increases as the price level decreases because:When the price level falls, households feel more wealthy, soconsumption and the demand for goods and services.When the price falls, demand for nominal money balances falls, theexchange rate rises which causes investment and aggregate demandto decrease.When the price falls, demand for nominal money balances falls, theinterest rate falls which causes investment and aggregate demand toincrease.When the price falls, real income decreases and consumptionincreases which increases aggregate demand.

In an economy, full-employment level is one when an economy is operated at its potential using the…

Business

Economics

C6

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter5: Introduction To Macroeconomics

Section: Chapter Questions

Problem 3.4P

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Concept explainers

Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.

Question

An increase in aggregate demand when the economy is operating at
near full capacity is likely to result in:
An increase in both output and the overall price level.
An increase in output but no increase in the overall price level.
An increase in the overall price level but no increase in output.
No increase in either output or the overall price level.

Aggregate Demand increases as the price level decreases because:
When the price level falls, households feel more wealthy, so
consumption and the demand for goods and services.
When the price falls, demand for nominal money balances falls, the
exchange rate rises which causes investment and aggregate demand
to decrease.
When the price falls, demand for nominal money balances falls, the
interest rate falls which causes investment and aggregate demand to
increase.
When the price falls, real income decreases and consumption
increases which increases aggregate demand.

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