Suppose the economy is initially in long-run equilibrium Then suppose there is an increase in military spending due to rising international tensions According to the model of aggregate demand and aggregate supply what happens to prices and output in the long run ?
Correct answer: D. Prices rise; output is unchanged from its initial value
- A. Output falls; prices are unchanged from the initial value
- B. Price fall; output is unchanged from its initial value
- C. Output and the price level are unchanged from their initial values
- D. Prices rise; output is unchanged from its initial value
Explanation
Higher military spending shifts aggregate demand right, raising output temporarily. In the long run output returns to its natural level, while the higher aggregate demand leaves the price level higher.
Last updated
About Macroeconomics
The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
Practise Macroeconomics
1,462 free Macroeconomics MCQs from Economics, each with the correct answer and an explanation. Unlimited attempts, no account needed.
Exams that ask Economics questions like this
Economics is on 2 papers prepared for on TestUstad, and all of them draw the same bank, so this question is worth knowing for every one of them.
Related questions
1. The most widely traded currency in the foreign exchange market is the ?
85% of the world's population lives in developing countries and receives about _____ of the world's income?
A 44-nation survey regrading religions found that_________________?
A bank has excess reserves to lend but is unable to find anyone to borrow the money This will _________ the size of the money multiplier?
A capital account surplus might be expected to cause a current account deficit because the associated ?