Suppose the economy is initially in long-run equilibrium Then suppose there is an increase in military spending due to rising international tensions According to the model of aggregate demand and aggregate supply what happens to prices and output in the long run ?

A. Output falls; prices are unchanged from the initial value
B. Price fall; output is unchanged from its initial value
C. Output and the price level are unchanged from their initial values
D. Prices rise; output is unchanged from its initial value

According to the interest rate effect aggregate demand slopes downward (negatively) because ?

A. lower prices increase money holdings decrease lending interest rates rise, and investment spending falls
B. lower prices increase the value of money holding and consumer spending increases
C. lower prices decrease the value of money holdings and consumers spending decreases
D. lower prices reduce money holdings increase lending interest rates fall, and investment spending increase

Refers to Exhibit 4. Suppose the economy is operating in a recession such as point B in Exhibit 4. If policy makers allow the economy to adjust to the long run natural rate on its own, ?

A. People will reduce their price expectations and the short run aggregate supply will shift right
B. People will raise their price expectations and aggregate demand will shift left
C. People will raise their price expectations and the short run aggregate supply will shift left
D. People will reduce their price expectations and aggregate demand will shift right

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