To determine the effect of the decrease in the price of steel due to new iron ore discovery which is used to produce steel.
Explanation of Solution
Discovery of a new iron ore deposit which is used to make steel will decrease the price of steel. This price decrease will increase the output of the economy and
An increase in steel production does not affect any of the components of aggregate demand. Hence, it will not affect the aggregate demand. It will neither increase nor decrease aggregate demand. Thus, options (a) and (b) are incorrect.
An increase in the production of steel will affect the supply side of the economy. Therefore, the statement that there will be no change in aggregate demand or supply is incorrect.
The Discovery of new iron ore will decrease the price of steel. This price decrease will increase the output of the economy and aggregate supply will increase. It will certainly not decrease the aggregate supply. Thus, option (e) is not correct.
The Discovery of a new iron ore deposit which is used to make steel will decrease the price of steel. This decrease in the price of steel will increase the aggregate supply as it shifts the
This is a supply-side factor.
Chapter 4R Solutions
Krugman's Economics For The Ap® Course
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