Assume initially that the economy is in equilibrium in the long run. Next, suppose investors' confidence in the future drops (they expect profits to decline in the future). a. Explain (using a graph) the effects of this shock on aggregated request, the price level, real GDP and aggregated offer in the short run. b. Suppose the government takes no action and investor confidence remains low. What kinds of adjustments happen over the long term? to the price level, real GDP, DA and OA during this adjustment period, illustrating the changes on your graph. Explain what happens

Assume initially that the economy is in equilibrium in the long run. Next, suppose investors' confidence in the future drops (they expect profits to decline in the future). a. Explain (using a graph) the effects of this shock on aggregated request, the price level, real GDP and aggregated offer in the short run. b. Suppose the government takes no action and investor confidence remains low. What kinds of adjustments happen over the long term? to the price level, real GDP, DA and OA during this adjustment period, illustrating the changes on your graph. Explain what happens

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter26: The Neoclassical Perspective

Section: Chapter Questions

Problem 2SCQ: Legislation proposes that the government should use macroeconomic policy to achieve an unemployment...

See similar textbooks

Similar questions

Suppose firms become optimistic about futurebusiness conditions and invest heavily in new capitalequipment.a. Draw an aggregate-demand/aggregate-supplydiagram to show the short-run effect of thisoptimism on the economy. Label the new levels ofprices and real output. Explain in words why theaggregate quantity of output supplied changes.b. Now use the diagram from part (a) to show thenew long-run equilibrium of the economy. (Fornow, assume there is no change in the long-runaggregate-supply curve.) Explain in words whythe aggregate quantity of output demanded changesbetween the short run and the long run.c. How might the investment boom affect thelong-run aggregate-supply curve? Explain.
A) Suppose that an economy has the Phillips curve π = π-1 – 0.5(u − 0.06). 1) Graph the short-run and long-run relationships between inflation and unemployment. 2)How much cyclical unemployment is necessary to reduce inflation by 3 percentage points? Using Okun’s law, compute the sacrifice ratio. B)Mathematically prove that balanced budget multiplier is one. Interpret it C)Explain destabilizing effect of deflation which supports the money hypothesis of great depression. Use graph where feasible. D)“The steeper is the LM curve, the more effective is the monetary policy” Do you agree with the statement. Graphically explain.
1) According to the Phillips Curve, as unemployment falls what happens to inflation? Why? 2) According to the Phillips Curve, as unemployment rises what happents to inflaiton? Why? 3) According to the Aggregate Supply/ Aggrgeate Demand model, if AD increases what happebs to Price Level GDP and Unemployment 4) Accroding to the AS/AD model, if AD decreases what happens to PL, GDP and unemployment? 5) According to the AS/AD model if AS decreases what happens to PL GDP and unemployment? 6) Based on your answer to #5 how would you show the decrease in AS on the Philips Curve?
Illustrate and interpretthe short-run and longrun effects of temporary and permanentsupply shocks
Using the ASAD graph and starting in long run equilibrium YA = Y* (see the model example in the textbook Figure 13.11) take each of following shocks one by one in separate graphs and decide if the event falls into the real shock (LRAS) category or aggregate demand (AD) shock category. Then graph each. Remember that “shocks” include both good and bad events and the graph should show that in the short run the economy is either that YA < Y* or YA > Y* A fall in the input price of oil A rise in consumer optimism A cut in business taxes if they buy new equipment Foreigners buy fewer US made goods. Consumer Fear New inventions (A) occur at a faster pace than usual A faster money growth rate A permanent cut in income taxes
Possitive short run relatioship between the prices level for outpput and reall gdp holding the prices of inputs fexed a- longo-run aggregate supply SRAS curve b- long run aggregate demand SRAS curve c- short eun aggregate supply SRAS curve d- short-run aggregate demand SRAS curve
Suppose the economy is in a long-run equilibrium.a. Draw a diagram to illustrate the state of theeconomy. Be sure to show aggregate demand,short-run aggregate supply, and long-runaggregate supply.b. Now suppose that a stock market crash causesaggregate demand to fall. Use your diagramto show what happens to output and the pricelevel in the short run. What happens to theunemployment rate?c. Use the sticky-wage theory of aggregate supplyto explain what happens to output and the pricelevel in the long run (assuming no change inpolicy). What role does the expected price levelplay in this adjustment? Be sure to illustrate youranalysis in a graph.
A) Explain thoroughly how reducing recession works B) Explain why the presence of the built-instabilizer is important to managing the macroeconomy.
An economy's aggregate demand curve (the relationship between short-run equilibrium output and inflation) is described by the equation:Y = 15,000 - 12,000π, where π is the inflation rate. Initially, the inflation rate is 2 percent or π = 0.02. Potential output Yp equals 14,640.Note: Keep as much precision as possible during your calculations. Your final answer for inflation should be accurate to at least two decimal places and output should be accurate to the nearest whole number.a) Find inflation and output in short-run equilibrium. Inflation : 0%Output : $0 b) Find inflation and output in long-run equilibrium. Inflation : 0%Output : $0
Legislation proposes that the government should use macroeconomic policy to achieve an unemployment rate of zero percent, by increasing aggregate demand for as much and as long as necessary to accomplish this goal. From a neoclassical perspective, how bill this policy affect output and the price level in the short nm and in the long run? Sketch an aggregate demand/aggregate supply diagram to illustrate your answer. Hint revisit Figure 26.4.