Answer:
1. a. aggregate demand shifts right.
As people are more optimistic, they will consume more in the short term because they feel as though prosperity is coming in the long term.
2. a. both the price level and real GDP rise.
Both of these would rise as Aggregate demand refers to GDP and price level would rise due to the new intersection with the Aggregate supply curve when the AD shifted right.
3. B. The expected price level rises. Bargains are struck for higher wages.
Expected price level will rise because demand is still increasing. Workers will want to benefit from this as well and so will negotiate higher wages.
4. d. short-run aggregate supply left.
As a result of the rise in expected price level and the subsequent negotiation for higher salaries, producers will find the cost of labor to be hire and so will limit production so that they do not spend as much. This will reduce supply thereby shifting the supply curve left.
5. d. the price level is higher and real GDP is the same.
The shift to the left in supply will lead to a higher price but the Real GDP will remain the same because there will be less goods produced so once prices are inflation adjusted, real GDP will be the same.
6. a. the interest rate rises, which causes the opportunity cost of holding money to rise.
If interest rates rise, people will hold less money because they could make a higher return by investing that money.
7. d. decrease, so the money supply decreases.
The money supply decreases because the Fed is taking money out of the banking system by selling bonds as people will pay the Fed for the bonds and the Fed will keep the money.
