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- ) What is the equation of the long-run aggregate supply curve? The income velocity of money is constant, and the money supply is fixed: V = 0.15 M = 5600 The production function is Y = F(L, K) = 8 x √L x √K The endowment of resources is given by the input combination (L, K) = (49, 25)Improved methods of inventory control were supposed to reduce fluctuations in inventory stocks. It is clear that these methods have helped reduce the equilibrium inventory/sales ratios in both the manufacturing and trade sectors over the past decade. Yet we find that during the 2001 recession, inventory investment accounted for more than the total decline in real GDP, the first time that had happened since 1949. Explain whether this result is due to a set of odd coincidences, or whether the improved methods of inventory control actually caused bigger fluctuations in inventory investment relative to final sales.Assuming Aggregate Demand and Aggregate Supply are initially at ADo and ASo respectively, which of the following explains the adjustment towards long-run equilibrium depicted in Figure B? a. Unemployment (resulting from the short-run equilibrium being below LRAS) causes wages to decline, which increases AS till long-run equilibrium is attained at full employment level of income and a lower price level. b. Government spending is increased, increasing AD to a level sufficient to attain long-run equilibrium at full employment level of income and a higher price level c. In attempting to produce beyond the economy's natural level of GDP, producers bid up wages and prices of other resources, causing the AS to decrease to the point where long-run equilibrium is restored. d. Taxes are increased reducing AD to a level consistent with long-run equilibrium
- Assume the following model of the closed economy in the short run, with the price level (P) fixed at 1.0: C=0.5(Y-T) T=1000 I=1500-250r G=1500 Md/p=0.5Y-500r Ms=1000 a) Derive a numerical formula for the IS curve, showing Y as a function of r alone. B)Derive a numerical formula for the LM curve, showing Y as a function of r alone. C) What are the short-run equilibrium values of Y, r, and national saving (S)?d)Assume that G increases by 1,500 (i.e., G = 3; 000). By how much will Y increase in short-run equilibrium? e)You are the chief economic adviser in this hypothetical economy. Do you believe that fiscal policy is more potent than monetary policy? Briefly discuss f)Derive the numerical aggregate demand (AD) curve for this economy, expressing Y as a function of PGiven the following circumstances, indicate whether or not the aggregate supply curve would shift and, if so, which way would it shift: The price of a barrel of oil doubles An advance in alternative energy technology significantly reduces its cost In order to maintain a relatively clean air quality, a carbon emissions tax is levied against firms with a carbon footprint As a result of fracking, the price of natural gas is significantly reduced Advances in technology increase the productivity of the American worker, on average, by 30%Suppose that a hypothetical economy has the following relationship between its real output and the input quantities necessary for producing that output: a. What is productivity in this economy?b. What is the per-unit cost of production if the price of each input unit is $2?c. Assume that the input price increases from $2 to $3 with no accompanying change in productivity. What is the new per-unit cost of production? In what direction would the $1 increase in input price push the economy’s aggregate supply curve? What effect would this shift of aggregate supply have on the price level and the level of real output?d. Suppose that the increase in input price does not occur but, instead, that productivity increases by 100 percent. What would be the new per-unit cost of production? What effect would this change in per-unit production cost have on the economy’s aggregate supply curve? What effect would this shift of aggregate supply have on the price level and the level of real output?
- Assume the economy of Chile is in a long-run equilibrium with full employment. In the short run,nominal wages are fixed.1. Draw a correctly labeled graph of short-run aggregate supply, long-run aggregate supply,and aggregate demand. Show each of the following.a. Equilibrium output, labeled Y1b. Equilibrium price level, labeled PL1 2. Assume that there is an increase in exports from Chile. On your graph in question 1,show the effect of higher exports on the equilibrium in the short run, labeling the newequilibrium output and price level Y2 and PL2, respectively.3. Based on your answer in part (b), what is the impact of higher exports on real wages inthe short run? Explain.4. As a result of the increase in exports, export-oriented industries in Chile increaseexpenditures on new container ships and equipment.a. What component of aggregate demand will change?b. What is the impact on the long-run aggregate supply? Explain.Which of the following describes the use of Keynesian macroeconomic policy to resolve an inflationary gap problem in the economy? a) Unemployment, resulting from the short-run product markets equilibrium being below Long-run Aggregate Supply (LRAS), causes wages to decline, which increases short-run Aggregate Supply (AS), until long-run equilibrium is attained at full employment level of income and a lower price level. b) Government spending is increased, increasing Aggregate Demand (AD) to a level sufficient to attain long-run equilibrium at full employment level of income and a higher price level. c) In attempting to produce beyond the economy's natural level of GDP, producers bid up wages and prices of other resources, causing the short-run Aggregate Supply (AS) to decrease to the point where long-run equilibrium is restored. d) Taxes are increased reducing Aggregate Demand (AD) to a level consistent with full employment.The United Kingdom’s economy is in short-run equilibrium with an output level at less than full employment. Using a correctly labeled aggregate demand and aggregate supply graph, show the following: Full employment output, labeled as Yf Equilibrium real output and price level, labeled as YE and PLE Assume that the UK government decreases domestic military expenditures. On the graph from question 1, show how the decreased military expenditures affect the following in the short run: Aggregate Demand Equilibrium real output and price level, labeled as Y2 and PL2. Is the UK government making a good decision in question 2? Why or why not? Explain using your good economic thinking skills!
- Consider starting from full-employment equilibrium in our Aggregate Demand and Supply model (with flexible wages and worker misperception of price level changes in the short run), at Po, QN on the output market graph below. Then we get an increase in Aggregate Demand from Agg Do to Agg D1. Group of answer choices a) In the long run, P will increase further above P1 as workers finally get a full cost of living raise. b) at P1, Q1, we are in a recessionary gap. c) In the long run, P and Q will return to their original levels when workers perceive the decrease in P. d) In the long run Q will increase further above Q1 as employment increases (due to workers getting wage increases). e) None of the other options.You are given the following information about the Aggregate Demand and Aggregate Supply in an economy of Gombakland. Amount of real domestic output demanded, billions Price level (price index) Amount of real domestic output supplied, billions $ 60 350 $240 120 300 240 180 250 180 240 200 120 300 150 60 a) Assuming the full-employment level of GDP is $220 billion, identify and describe the type of macroeconomic problem currently faced by Gombakland. Draw an appropriate diagram with correct labels to support your answer. b) Given that the marginal propensity to consume (MPC) for Gombakland is 0.5, calculate the required change in government spending which would be most consistent with closing the GDP-gap. Then calculate the required change in taxation as an alternative policy to achieve the same result. Explain your answer and show the effect of this policy intervention in the same diagram you have drawn in part (a).Consider the following economy: Labor supply: Nt= 90 Capital stock: Kt = 90 Government spending: Gt = 20 Tax collections: Tt = 20 Production function: Yt = 2(Kt)0.5 (Nt)0.5 Real money demand Lt = 2Yt - 200rt Consumption function: Ct = 16 + 0.8(Yd)t Domestic price level: Pt = 4 Investment function: It = 25 - 50rt Nominal money supply: Mt = 1296 QUESTIONS: Find an expression for the IS curve. Find an expression for the LM curve. Find an expression for the aggregate demand curve. What are the short run equilibrium values for output, interest rate and price level? Plot (a)-(d) on the IS-LM and AD-SRAS-LRAS diagrams. Make sure to label (i) the axes, (ii) the curves and (iii) the initial equilibrium levels. Is this a short-run level of output also a long-run equilibrium? Explain. Suppose that the government the Fed increases money supply to Ms=1620. Find the new short-run equilibrium levels of output and interest rate Find the long-run equilibrium levels of output, interest rates and…