Refer to the graphs above. Suppose a firm is currently producing 500 computers per week and charging a price of $1000. How will the firm respond to a positive demand shock if prices are inflexible?

Which of the following is a reason why increases in the price level result in a decline in aggregate expenditure?

A) Price level increases in the United States relative to other countries raise net exports, which lowers aggregate expenditure. B) As the price level rises, government spending falls, which lowers aggregate expenditure. C) Price level increases cause firms and consumers to hold more money, which raises the interest rate. Higher interest rates lower consumption and planned investment expenditures, which lowers aggregate expenditure. D) Price level increases raise real wealth, which causes consumption spending and aggregate expenditure to decline.

Assuming the existence of economies of scale, if a firm finds that it can reduce its unit cost by decreasing its scale of production, it means that

A) it has too much production capacity relative to its demand. B) it should try to produce less. C) the law of diminishing returns has not taken effect. D) it has too much fixed overhead relative to its variable cost.