Chapter 10: Quiz Answers -- The Fixed-Price AD/AS Model

1. The fixed-price AD/AS model is appropriate to use when
   all of the above. If resources are not fully utilized, then the economy can more easily grow without resorting to price increases. In addition, prices are less likely to change the shorter the time period under study.

2. Suppose that AD shifts left in the fixed-price model. We know that
   the level of output falls. The price level if fixed by assumption, and the unemployment rate rises.

3. If the MPC is 0.8, Ca (autonomous consumption) is $100, and DI (disposable income) is $1,000, then consumption in the economy is
   $900. C = C_A + MPC(DI), so C = $100 + 0.8($1000) = $900.

4. If the MPC is 0.75, Ca is $100, and Investment is $400, then equilibrium output is
   $2,000. The output multiplier is 1/(1-0.75)=4 and autonomous consumption and investment is $500.

5. Which of the following will make investment increase?
   none of the above. Each of the explanations provided will decrease investment.

6. If investment shifts rightward, then
   The AD curve shifts right. Remember that investment is a component of Aggregate Demand. When autonomous investment rises, the AD curve shifts to the right.

7. Suppose that autonomous consumption falls. This change will shift the
   AD curve to the left. Autonomous consumption is a component of Aggregate Demand.

8. If the economy is fully employed and there is a big increase in investment spending, the most likely outcome is that
   there is an increase in both output and the price level; the fixed-price model is not the best one to use in this scenario.

9. The fixed-price model and the income-expenditure model embody the same assumptions.
   True. In fact, these two models are different ways to represent identical concepts. The key assumption is that the price level is fixed in both models.

10. The fixed-price model is only relevant when government sets prices in the economy.
    False. the fixed-price model is relevant in the short run and when the economy has resources that are not fully employed.