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Consider an economy in long-run equilibrium with an aggregate real output of $10 trillion and an aggregate price level of 80. Assume that individuals in the economy have rational expectations and that wages and prices are flexible. Suppose the central bank wishes to raise aggregate real output further by implementing an expansionary monetary policy. There are four possible cases: Case 1 The public correctly anticipates the new long-run price level. The public overestimates the new long-run price level. Case 2 Case 3 The public underestimates the new long-run price level. Case 4 The public does not anticipate any change in the price level. The following four graphs show the short-run and long-run effects of the central bank's action on the economy in each of these cases. Each graph includes the economy's long-run aggregate supply curve (LRAS), its initial aggregate demand curve (AD1), its actual aggregate demand curve after monetary expansion (AD2), its perceived (if different from actual) aggregate demand curve (AD3), its initial short-run aggregate supply curve (SRAS1), its short-run aggregate supply curve based on the new expected price level (SRAS2), and its short-run aggregate supply curve based on the revised (if applicable) expected price level (SRAS3). The black connected points (plus symbols) show the path that the economy takes. Graph G LRAS H Graph P LRAS (?)

Consider an economy in long-run equilibrium with an aggregate real output of $10 trillion and an aggregate price level of 80. Assume that individuals in the economy have rational expectations and that wages and prices are flexible. Suppose the central bank wishes to raise aggregate real output further by implementing an expansionary monetary policy. There are four possible cases: Case 1 The public correctly anticipates the new long-run price level. The public overestimates the new long-run price level. Case 2 Case 3 The public underestimates the new long-run price level. Case 4 The public does not anticipate any change in the price level. The following four graphs show the short-run and long-run effects of the central bank's action on the economy in each of these cases. Each graph includes the economy's long-run aggregate supply curve (LRAS), its initial aggregate demand curve (AD1), its actual aggregate demand curve after monetary expansion (AD2), its perceived (if different from actual) aggregate demand curve (AD3), its initial short-run aggregate supply curve (SRAS1), its short-run aggregate supply curve based on the new expected price level (SRAS2), and its short-run aggregate supply curve based on the revised (if applicable) expected price level (SRAS3). The black connected points (plus symbols) show the path that the economy takes. Graph G LRAS H Graph P LRAS (?)

Survey Of Economics
Survey Of Economics
10th Edition
ISBN:9781337111522
Author:Tucker, Irvin B.
Publisher:Tucker, Irvin B.
Chapter20: Monetary Policy
Section20.A: Policy Disputes Using The Self Correcting Aggregate Demand And Supply Model
Problem 4SQP
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Consider an economy in long-run equilibrium with an aggregate real output of $10 trillion and an aggregate price level of 80. Assume that individuals in the economy have rational expectations and that wages and prices are flexible. Suppose the central bank wishes to raise aggregate real output further by implementing an expansionary monetary policy. There are four possible cases: Case 1 The public correctly anticipates the new long-run price level. Case 2 The public overestimates the new long-run price level. Case 3 The public underestimates the new long-run price level. Case 4 The public does not anticipate any change in the price level. The following four graphs show the short-run and long-run effects of the central bank's action on the economy in each of these cases. Each graph includes the economy's long-run aggregate supply curve (LRAS), its initial aggregate demand curve (AD1), its actual aggregate demand curve after monetary expansion (AD2), its perceived (if different from actual) aggregate demand curve (AD3), its initial short-run aggregate supply curve (SRAS1), its short-run aggregate supply curve based on the new expected price level (SRAS2), and its short-run aggregate supply curve based on the revised (if applicable) expected price level (SRAS3). The black connected points (plus symbols) show the path that the economy takes. 200 180 120 Graph G LRAS 200 180 Graph P (?)
Transcribed Image Text:Consider an economy in long-run equilibrium with an aggregate real output of $10 trillion and an aggregate price level of 80. Assume that individuals in the economy have rational expectations and that wages and prices are flexible. Suppose the central bank wishes to raise aggregate real output further by implementing an expansionary monetary policy. There are four possible cases: Case 1 The public correctly anticipates the new long-run price level. Case 2 The public overestimates the new long-run price level. Case 3 The public underestimates the new long-run price level. Case 4 The public does not anticipate any change in the price level. The following four graphs show the short-run and long-run effects of the central bank's action on the economy in each of these cases. Each graph includes the economy's long-run aggregate supply curve (LRAS), its initial aggregate demand curve (AD1), its actual aggregate demand curve after monetary expansion (AD2), its perceived (if different from actual) aggregate demand curve (AD3), its initial short-run aggregate supply curve (SRAS1), its short-run aggregate supply curve based on the new expected price level (SRAS2), and its short-run aggregate supply curve based on the revised (if applicable) expected price level (SRAS3). The black connected points (plus symbols) show the path that the economy takes. 200 180 120 Graph G LRAS 200 180 Graph P (?)
PRICE LEVEL PRICE LEVEL 200 180 160 140 2 2 2 2 2 2 - 120 200 180 160 140 120 100 0 SRAS Case 1 Case 2 Case 3 Case 4 SRAS SRAS 16 0 24 10 12 REAL GDP (Trillions of dollars) SRAS SRAS Graph G Graph 8 Graph V 3 1 LRAS 6 18 14 LRAS 0 2 REAL GDP (Trillions of dollars) $ $ $ $ 16 16 AD 2 AD 18 20 18 AD AD AD 1 PRICE LEVEL PRICE LEVEL 200 180 100 140 120 60 40 20 0 150 140 130 100 0 5 SRAS SRAS 10 12 6 2 REAL GDP (Trillions of dollars) SR Price Level SRAS SRAS Graph P SRAS 2 LRAS Graph X 2 7 8 9 REAL GDP (Trillions of dollars) LRAS 14 $ $ $ 13 18 AD 2 AD Identify the correct graph for each of the four cases and fill in the following table. SR Real GDP(Trillions) LR Real GDP(Trillions) 20 AD AD AD 2 3 1 (? LR Price Level T
Transcribed Image Text:PRICE LEVEL PRICE LEVEL 200 180 160 140 2 2 2 2 2 2 - 120 200 180 160 140 120 100 0 SRAS Case 1 Case 2 Case 3 Case 4 SRAS SRAS 16 0 24 10 12 REAL GDP (Trillions of dollars) SRAS SRAS Graph G Graph 8 Graph V 3 1 LRAS 6 18 14 LRAS 0 2 REAL GDP (Trillions of dollars) $ $ $ $ 16 16 AD 2 AD 18 20 18 AD AD AD 1 PRICE LEVEL PRICE LEVEL 200 180 100 140 120 60 40 20 0 150 140 130 100 0 5 SRAS SRAS 10 12 6 2 REAL GDP (Trillions of dollars) SR Price Level SRAS SRAS Graph P SRAS 2 LRAS Graph X 2 7 8 9 REAL GDP (Trillions of dollars) LRAS 14 $ $ $ 13 18 AD 2 AD Identify the correct graph for each of the four cases and fill in the following table. SR Real GDP(Trillions) LR Real GDP(Trillions) 20 AD AD AD 2 3 1 (? LR Price Level T
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