Q3: Consider a baseline long run equilibrium where output is 22 trillion dollars, and the price level is 100. Note: In the Long Run Steady State Equilibrium, Price expectation is the same as price level & unemployment is 5% or lower. None of these are guaranteed in the short run. Usually, short run equilibrium is called an underemployment equilibrium.• You should answer each step in the following answer 3 table. Answer 3)StepsStep 1) What happens in the short run toequilibrium price level and aggregate quantity &why? (Think about which curve shifts in whichdirection and why & where is the new short runequilibrium?)Step 2) What happens to the initial equalitybetween price level and price expectations becauseof COVID19?Step 3) What happens to price expectations in thelong run? (The market adjustment phase)Step 4) What happens next in the marketadjustment phase? (Think about which curve shiftsin which direction and why & where is the newshort run equilibrium?)Step 5) Now that your Keynesian Colleague hasproposed a massive expansionary fiscal policy, doyou think it will work as an in-built stabilizer (i.e.,return the economy back to a long run: would itstop market adjustment?)? Are there policies thatyou will propose as a Classical Macroeconomist thatis distinct from your Keynesian Colleague'sproposal?Your Answers

Answered: Image /qna-images/answer/05f4a6ca-3ce4-4481-9997-97ce8b06366e.jpg

Answered: Consider a baseline long run…

Principles of Macroeconomics (MindTap Course List)

7th Edition

ISBN:9781285165912

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter22: The Short-Run Trade-off Between Inflation And Unemployment

Section: Chapter Questions

Problem 3PA

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Q3: Consider a baseline long run equilibrium where output is 22 trillion dollars, and the price level is 100. Note: In the Long Run Steady State Equilibrium, Price expectation is the same as price level & unemployment is 5% or lower. None of these are guaranteed in the short run. Usually, short run equilibrium is called an underemployment equilibrium.
• You should answer each step in the following answer 3 table.

Answer 3)
Steps
Step 1) What happens in the short run to
equilibrium price level and aggregate quantity &
why? (Think about which curve shifts in which
direction and why & where is the new short run
equilibrium?)
Step 2) What happens to the initial equality
between price level and price expectations because
of COVID19?
Step 3) What happens to price expectations in the
long run? (The market adjustment phase)
Step 4) What happens next in the market
adjustment phase? (Think about which curve shifts
in which direction and why & where is the new
short run equilibrium?)
Step 5) Now that your Keynesian Colleague has
proposed a massive expansionary fiscal policy, do
you think it will work as an in-built stabilizer (i.e.,
return the economy back to a long run: would it
stop market adjustment?)? Are there policies that
you will propose as a Classical Macroeconomist that
is distinct from your Keynesian Colleague's
proposal?
Your Answers

Definition Video Definition Point where the demand and supply curves intersect. At the equilibrium price the quantity supplied of a good is equal to the quantity demanded. When the market is not in equilibrium, market surplus or market shortage occurs. The region that is above the price equilibrium indicates market surplus and the region below the price equilibrium indicates market shortage. Video

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