Economics II
Written Assignment
Aggregate Demand and Aggregate Supply
11. For each of following events, explain the short-run and the long-run effects on the output and the price level, assuming policymakers take no action.
(a) The stock market declines sharply, reducing consumers’ wealth.
AS1
AS2
AD1
AD2
Y2
Y1
P1
P2
P3
LRAS
A
B
C
P
AD-AS diagram
Output
0
Since the stock market declines sharply, the people’ wealth are being affected. In short run, it leads to a fall in aggregate demand which would shift aggregate-demand curve from AD1 to AD2. The economy is reached from point A to point B because the output level and the price level would fall from Y1 to Y2 and falls from P1 to P2 respectively.
Over
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The economy would then move from point A to point B as the price level decrease from P1 to P2 and the output increase from Y1 to Y2.
(d) A recession overseas causes foreigners to buy fewer U.S. goods.
AS1
AS2
AD2
Y2
Y1
P2
P1
LRAS
B
A
P
AD-AS diagram
Output
0
LRAS2
AD1
C
P3
When there is a recession overseas, it causes the foreigners to buy less U.S. goods and so decrease the net exports. As a result, the aggregate demand curve would shift to the left. With the declining output and price level, the economy would be reached from point A to point B.
Over time, the short-run aggregate-supply curve would shift rightward and thus the economy would move to point C. And, the price level would fall and the output would return back to the natural rate of output Y1.
13. Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment.
(a) Draw an aggregate-demand / aggregate-supply diagram to show the short-run effect of this optimism on the economy. Label the new levels of prices and real output. Explain in words why the aggregate quantity of output supplies changes.
AS1
AD2
AD1
Y1
Y2
P1
P2
A
B
P
Output
0
If the firms are optimistic about the future business conditions and invest heavily in new capital equipment, it tends to raise the investment and so is the aggregate demand which
a) Given that the increase in unemployment means a decrease in real GDP, and that consumer spending and investment spending reductions mean a fall in aggregate demand, the economy is in recession. This is due to a fall in aggregate demand, and the fall in investment may lead to higher costs of production in the future.
17. Assume that the market for the Euro begins in equilibrium. Then, incomes rise very fast in Europe while the United States enters a recession. In the market for the Euro,
Human behavior is sensitive to and strongly influenced by its environment. When the economy starts recession, manufactures would shrink the volume of production, investor will invest less and people will spend less money on new products, and as the result, which would causes the economy become worse. And on the other hand, good economy leads people to buy more.
Increasing government spending will shift the IS curve to the right. Increasing government spending will cause aggregate demand to go up, and shift the IS curve to the right.
An economic recession occurs when the economy is suffering, and unemployment is on a rise. A drop in the stock market and a decrease in the housing market will also affect the economy due to a recession. Higher interest rates affect the economy constrain liquidly or the cash available to invest in stocks and businesses. Inflation alludes to the rise in prices of goods and services which also puts a strain on the economy further adding to a recession. Businesses were lost and consumer spending dwindled the only category that remained safe was healthcare. The economic meaning of a recession is a decline in the Gross Domestic Product (GDP) consisting of two consecutive quarters on a decline. If the economy is bad consumers are less likely to spend money on goods and service. The effects of a declining economy forced the government to create monetary
Firms and individuals determine if it’s worth it to invest in capital improvements when the marginal product of capital is more than the interest paid on each unit of capital.
(Figure: The Multiplier) Look at the figure The Multiplier. If this economy is at Y1 and the price level decreases:
cause a leftward shift of the new auto demand curve because they are a normal good. c.
Consumer expenditures rising during this term will move the aggregate demand curve to the right as increased spending increases demand. This BLS report indicates that the next term should show statistical aggregate demand increases, and according to the Classical model perspective encourages a laissez-faire approach concerning correction of the long-term economic factors (Colander, 2010). The Classical model works perfectly as consumer expenditures are trending on the rise when factoring consumer expenditures. Until a more apparent downturn shows itself, the invisible hand should continue to work naturally.
The analysis will identify two microeconomics and two macroeconomics principles or concepts from the simulation, and explain why each principle or concept is in the category of macroeconomics or microeconomics. The analysis will identify at least one shift of the supply curve, and one shift of the demand curve from the simulation and what causes the shifts. The analysis will show for each shift, how it would affect the equilibrium price, quantity, and decision making. It will detail application to learned material about supply and demand from the simulation to workplace or real-world product. It will detail how concepts
Two macroeconomic variables that decline when the economy goes into a recession are real GDP and investment spending. GDP will decrease because the economy will be producing fewer goods and services overall. Investment spending, spending on new capital, will decrease in order to conserve and spend in other areas. The unemployment rate is one macroeconomic variable that will rise during a recession. If an economy begins producing fewer goods and services, businesses will need fewer employees to meet the production demand.
“It is not about how hard you fall, but how you get up and keep going.” Economic recession may be a natural phenomenon in the world’s economies. Every market has its peaks and falls, definitely the United States of America has hers.
A recession is full-proof sign of declined activity within the economic environment. Many economists generally define the attributes of a recession are two consecutive quarters with declining GDP. Many factors contribute to an economy's fall into a recession, but the major cause argued is inflation. As individuals or even businesses try to cut costs and spending this causes GDP to decline, unemployment rate can rise due to less spending which can be one of the combined factors when an economy falls into a recession. Inflation is the general rise in prices of goods and services over a period of time. Inflation can happen for reasons such as higher energy and production costs and that includes governmental debt.
level of investment, capital, and productivity. This suggests that, in the long-term, an increase in
Real GDP falls back to its long run equilibrium level at Y0, and prices rise again to P2. However, since the economy is now in equilibrium again there seems no reason for further inflation. The only way that this could lead to inflation, rather than a one-off increase in prices, is if aggregate demand keeps increasing. This can only happen if the government allows the quantity of money supplied to constantly increase.