Using the aggregate demand-aggregate supply model, predict what happens in the short run when there is a general decrease in raw materials cost.
A) The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.
B) The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases.
C) The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.
D) The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.

Question

Quizplus · Accepted Answer

A decrease in raw materials cost leads to a decrease in production costs, which results in an increase in aggregate supply. The aggregate demand curve remains unchanged, as there is no change in consumer spending or investment. The increase in aggregate supply leads to a decrease in price level and an increase in real GDP, creating a short-run equilibrium at a lower price level and a higher level of output.

Using the Aggregate Demand-Aggregate Supply Model, Predict What Happens in the Short