Using the aggregate demand-aggregate supply model, predict what happens in the short run when there is a general decrease in raw materials cost.Question 15Select one:a.The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.b.The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases.c.The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.d.The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.
Question
Using the aggregate demand-aggregate supply model, predict what happens in the short run when there is a general decrease in raw materials cost.Question 15Select one:a.The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.b.The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases.c.The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.d.The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.
Solution
The correct answer is a. The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.
Here's why:
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A decrease in the cost of raw materials makes production cheaper for businesses. This means that companies can produce more goods and services at every price level.
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This increase in production is represented by a rightward shift in the aggregate supply curve. The aggregate demand curve is not affected because the cost of raw materials does not directly affect the amount of goods and services that consumers want to buy.
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The increase in supply of goods and services (with demand staying the same) leads to a decrease in the overall price level. This is because businesses are able to produce more, so they can afford to lower their prices.
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Finally, the increase in supply also leads to an increase in real GDP. This is because GDP is a measure of the total amount of goods and services produced in an economy, and we've established that this total amount has increased.
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