Explain how the AD curve can be derived from the IS-MP model
What will be an ideal response?
The aggregate demand curve (AD) is all of the equilibrium combinations of the output gap and the price level. Consider the effect of an increase in the price level on the IS curve. In the money market, an increase in the price level causes the demand for money curve to shift to the right, increasing the equilibrium interest rate. A higher interest rate leads to a decline in aggregate expenditure, which causes a movement up along the IS curve, resulting in a lower level of real GDP relative to potential GDP. The increase in the price level causes a movement along the IS curve. If we kept varying the price level and tracing the effects on the IS curve, we would have plotted all the points on the aggregate demand curve.
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Which of the following is not a reason for differences in total factor productivity across countries?
A) Differences in the size of population. B) learning by doing. C) barriers to the adoption of new technology. D) inefficient allocation of factors of production across firms in some countries.
In order for the law of diminishing returns to be present, we must have
a. at least one factor of production to be fixed b. output decreasing as more laborers are hired c. the price of labor increasing as more workers are hired d. simultaneous changes in labor and capital e. double the output when labor input is doubled