Quiz 23: Aggregate Demand and Aggregate Supply

The idea of President-RO proclaiming that the thanksgiving would fall a week earlier than usual so that the shopping period before Christmas would be longer. This augmentation of the shopping period between Thanksgiving and Christmas was to increase aggregate demand. From the aggregate demand and supply diagram, we could observe that this could increase output back to its long-run equilibrium level, and shows Price level and Quantity of output. Initially the economy is at short run equilibrium at output level Y 1. The reaction of thanksgiving earlier will lead to rightward shift in the aggregate demand curve, so that the economy moves back to the long run equilibrium with higher level of output with higher prices. The reason is to start the process of spending and earning. To spend, one has to earn and earning starts when one spends on consumption.

The long-run aggregate supply curve is vertical because in the long run because the quantity of goods and services supplied depends on the economy's labor, capital , natural resources, aggregate supply and technology but not on the overall level of prices. Technology is the existing production technology used to turn these resources into goods and services. The overall level of price does not have an effect on these long-run determinants of real GDP.

Stagflation: Stagflation occurs when there is a leftward shift in the short run aggregate-supply curve. The effect of this shift makes the output to fall and price level to raise that in turn leads to high inflation and unemployment rate. Hence, option 'c' is correct.