TThere is an inverse relationship: the lower the

price level,the higher the real GDP or real

nationaloutput
ut

A lower price level decreases the demand for money, which decreases the equilibrium
interest rate and increases investment and interest
-sensitive components of consumption and, therefore, the real output.

ple will spend more,thus increasing the real output.

A lower U.S.price level means prices for goods produced in the United Statesare lower
relative to the prices in foreign countries.Thus,people will buy more U.S.-producedgoods
and fewer foreign produced goods.This increases net exports,a component ofreal GDP.
The demandcurve for a single product is downward sloping because ofdiminishing margi
 When there are a lot of unemployed resources or a constant price level as in a recession or
depression

AS is vertical when real GDP is at a level with unemployment at the full-employment level
and where any increase in demand will result only in an increase in prices. The economy is
unable to produce any more goods and services for a sustainable period of time

? In this range, resources are getting closer to full-employment levels, which creates upward
pressure on prices. The upward pressure on prices is caused by rising costs of doing business.
Sticky wages and/ or sticky prices cause the AS curve to be positively sloped. Wages and
prices may be slow to adjust, or sticky, if firms or workers lack information.
With a horizontal SRAS curve, an increase in AD results in an increase in real GDP
and no change in the price level. With a positively sloped SRAS curve, an increase in
AD results in increases in real GDP and the price level. With a vertical SRAS curve,
an increase in AD results in no change in real GDP and an increase in the price level.

. Answer depends on current economic conditions.

 p and y

There is excess supply ofgoods and services.Inventories arebuilding

up.To reduce the inventory levels,firms will cut prices and
output.The price level will fall,and real output will decrease.This
would happen because higher inventories will cause sellers toreduce
prices; lower prices will provide fewer incentives to increase
production.However,consumers will purchase more output at lower
prices.

There is excess demand.Inventories are below intended levels.Firms will seek to increase
inventory levels,prices will rise and output will increase.This wouldhappen because competition
among buyers will increase the price level; increased prices willencourage producers to increase
their output and consumers will buy
less.PP1SRASADYREALGDPPRICELEVELP2Figure25.1EquilibriumPriceandOutputLevels
Increased orders for exports will cause
more people to be hired and their increased income will

result in increased consumer spending.AD will increase

With increased discretionary incomes,

taxpayers will increase comsumption.AD will increase
 Now consumers who had been unem-ployed or
reluctant to spend their savings will respond
bypurchasing many goods they had postponed
buying.Thegovernment is also increasing spending
and its demandfor goods and services.AD will
increase.

Recipients ofSocial Security will haveless income to

spend.Local school districts will cut backby laying
offteachers or will raise taxes.Either actionwill reduce
discretionary income,and,thus
consumptiondecreases.In turn,AD will decrease
 The new standards result in increasesin the costs
ofproducing automobiles and trucks.Thisdecreases AS

The fine weather will increase the sup-ply ofcorn and

wheat,and ifdemand remains constant,the price will
decrease.This in turn will decrease theprice ofinputs for
many food-related industries.TheSRAS curve will shift to the
right

The reduction in transportation costswill mean lower operating

costs for industries using theJeeps and trucks.The SRAS curve
will shift to the righ
A significant decrease in foreign goods,including inputs to American industries,will
increase thecost ofproduction.The SRAS curve will shift to the left.

Higher taxes and a reduction in trans-fer payments reduce disposable income,which r

 A decrease in consumer confidence decreases consumption spending.

The increase in investment spendingwill increase AD.The increase in machinery

increasesSRAS

Econoland’s exports increase.ADincreases