Aggregate demand curve is the curve that shows the relationship between general price level and production level.

Deposit money is money in the form of demand deposit that is created by banks as a result of accepting deposits and loaning of funds.

The rise in prices increases the demand for money. At the initial interest rate i0, the increase in prices will create an excess demand for money in markets. Economic agents will want to hold more money because of increasing prices. Since we assumed that money supply is constant, money market can only reach an equilibrium at a higher interest rate. Because of increased interest rate in money market, financing cost of investment will increase and this makes some investment projects already planned unprofitable at new high interest rate. It is obvious that this situation implies a decrease in planned investment expenditures. The decrease in planned investment expenditures in the case of an increase in interest rates means that aggregate expenditures also decrease. In this case, production falls.

Required reserve ratio is the ratio that is determined by central bank and indicates the quantity of reserves that banking system holds against their liabilities.

We can see the effects of changes in saving rate, population growth and productivity growth on the steady-state capital-labor ratio and the long-run living standards in the Solow growth model.

The Solow growth model implies that, with no productivity growth, the economy reaches a steady state, with constant capital-labor ratio, output per worker, and consumption per worker and the fundamental determinants of long-run living standards are the saving rate, population growth and productivity growth. The model also implies that the rate of productivity improvement is the dominant factor determining how quickly living standards rise and that an increase in the saving rate has no impact on the long-run rate of economic growth.

Serving as a Store of Value: The third function of money is to be a store of value. Money, as a store of value, ensures to keep purchasing power on hand.

Demand-pull inflation is the inflation caused by aggregate demand increases.

We can determine the comparative advantage of Lakeland by comparing the absolute disadvantages in the production of corn and wheel. For Lakeland, the absolute disadvantage in corn production (4) is greater than the absolute disadvantage in wheel production (1,6). In other words, the absolute disadvantage is smaller in Wheel production for Lakeland, meaning that Lakeland has a comparative advantage in the production of wheel. In this case, Sunland has a comparative advantage in the production of corn.

Equilibrium in Keynesian Model

According to Keynes, equilibrium income can be achieved at the level of underemployment or overemployment. What is important here is the level of aggregate demand. Since it is difficult to change the production capacity that determines aggregate supply in the short term, the level of income depends on aggregate demand or aggregate expenditures. In other words, firms give their production decisions according to the expected aggregate expenditure or aggregate demand level.

If the economic units plan to spend more, the sales expectations of the companies will increase and they will make more production. As it is seen, Keynes links the deviations from full employment to the inadequacy of aggregate expenditures in the economy. Accordingly, full employment in the economy can be achieved by an adequate level of aggregate expenditure. Then, Keynesian theory criticizes the views expressed by Classics on investment as a function of the interest rate and on wage-price elasticity.

The Keynesian theory argue that the economy is not always be at full employment equilibrium because flexible prices and wages are not always valid. According to this opinion, there are many factors that prevent wages and prices from being flexible. For this reason, markets are moving away from fully competitive structure. In some sectors the existence of firms that do not want to reduce prices may be the case. Prices in these sectors can remain at the same level for a long time instead of falling when there is a fall in demand or expenditure.Because of the existence of strong labor unions and long term wage contracts, the same is also true in labor markets.

Correct answer is A.

General Equilibrium refers to the situation of concurrent equilibrium of the internal and external balance of an economy.

In the ages before Christ, it is known that the most commonly used money was cow.

Stagflation is the situation in which prices increase while production decreases.

In an economy with commodity money, for instance, if both gold and silver coins are in use (in circulation) at the same time, an interesting situation emerges. Since gold as a commodity has a greater value than silver, nobody wants to spend coins in his/her pouch and everyone tries to spend silver coins first. If everybody behaves like that, the money passing from hand to hand will be silver coins and gold coins will stay in people’s pouch. If we call silver coins as bad money and gold coins as good money, we can easily say that bad money drives out good money in the market. This phenomenon is known as Gresham’s Law.

Because of continuous full employment in the economy, volume of output (Y) does not change in the long run. On the other hand, since money is the only medium of exchange in classical world, velocity of money remains constant. Classical economists insist that factors that determine the velocity are people’s habits to spend and to pay. These factors do not exhibit big changes, at least in the short run. In that case, when the supply of money (M) increases, for instance, 10 percent, since output (Y) and velocity (V) are assumed as constant, price level (P) must also increase 10 percent. As you noticed from this example, the rise in the supply of money directly increases aggregate expenditures and is reflected to nominal income with the same direction and the same rate. If you think of these changes, you realize of course that, the full increase in nominal income stems from increase in prices.

The cost changes that cause the displacement of the aggregate supply curve are called cost or supply shock.

Country’s consumption possibilities exceed its production possibilities with international trade leading to a higher consumption satisfaction to the consumer.

The instruments of the fiscal policy are the public expenditure and taxes.

Indirect channel between quantity of money and economy works via interest rate. Decrease in money supply increases equilibrium interest rate, this increase in interest rate decreases investment expenditures. Decreasing investment spending reduces both aggregate expenditures and equilibrium level of income.