If the price of inputs rises and consumer expectations about future economic activity worsens:
a. Aggregate demand rises, and aggregate supply falls.
b. Aggregate demand rises, but aggregate supply does not change.
c. Aggregate demand and aggregate supply fall.
d. Aggregate demand falls, and aggregate supply rises.
e. Aggregate demand and aggregate supply rise.
.C
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What will be an ideal response?
You explain to your roommate Surya, who makes beaded headbands, about an economic theory which asserts that consumers will purchase more of a product at lower prices than they will at higher prices
She contends that the theory is incorrect because over the past two years she has lowered the price of her headbands and yet has seen a decrease in sales. How would you respond to Surya? A) I will explain to her that she is making the error of reverse causality: it is the decrease in demand that has caused her to lower her prices. B) Surya is right; she has evidence to back her claim. The theory must be erroneous. C) Surya is making the mistake of assuming that correlation implies causation. D) I will explain to her that there are some omitted variables that have contributed to a decrease in her sales such as changes in income.