What happens to bring the AD–AS system back into equilibrium when prices are below the equilibrium level? Above the equilibrium level?
What will be an ideal response?
When prices are below the equilibrium level, there is excess demand for goods. This will cause prices to rise, thanks to demand-pull inflation, as businesses raise prices to deal with the high demand. Prices will then rise and stabilize at their equilibrium level.
When prices are above the equilibrium level there will be an excess supply of goods at that price level. Without enough people to purchase goods at their current prices, producers will lower prices to provoke demand. Producers will continue to lower prices until production matches demand and the equilibrium price level is reached.
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a. True b. False Indicate whether the statement is true or false
Based upon a Keynesian viewpoint, to stimulate the economy the government should do all of the following except
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