Suppose an economy is in long-run equilibrium. The central bank raises the money supply by 5 percent.Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium.Price LevelLRAS-------AS1Quantity of OutputAS2Aggregate DemandAggregate DemandAggregate Supply(?) Now adjust the graph to show the new long-run equilibrium.What causes the economy to move from its short-run equilibrium to its long-run equilibrium?The government must increase spending to increase aggregate demand.Nominal wages, prices, and perceptions will adjust upward to this new price level.The government must increase taxes to curb aggregate demand.Nominal wages, prices, and perceptions will adjust downward to this new price level.According to the sticky-wage theory of aggregate supply, nominal wages at the initial equilibrium are greater than nominal wages at theshort-run equilibrium, and equal tonominal wages at the long-run equilibrium. Real wages at the initial equilibriumare greater than nominal wages at the short-run equilibrium, and greater than nominal wages at the long-run equilibrium. Judging by theimpact of the money supply on nominal and real wages, this analysis is not consistent with the proposition that money has real effects in theshort run but is neutral in the long run.

AD-AS equilibrium: Aggregate demand refers to the total demand for commodities and services made by…

Suppose an economy is in long-run equilibrium. The central bank raises the money supply by 5 percent. Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium. Price Level LRAS AS₁ Quantity of Output AS2 Aggregate Demand Aggregate Demand Aggregate Supply

Suppose an economy is in long-run equilibrium. The central bank raises the money supply by 5 percent. Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium. Price Level LRAS AS₁ Quantity of Output AS2 Aggregate Demand Aggregate Demand Aggregate Supply

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter9: Classical Macroeconomics And The Self Regulating Economy

Section: Chapter Questions

Problem 14QP

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Question

Suppose an economy is in long-run equilibrium. The central bank raises the money supply by 5 percent.
Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium.
Price Level
LRAS
-------
AS1
Quantity of Output
AS2
Aggregate Demand
Aggregate Demand
Aggregate Supply
(?)

Now adjust the graph to show the new long-run equilibrium.
What causes the economy to move from its short-run equilibrium to its long-run equilibrium?
The government must increase spending to increase aggregate demand.
Nominal wages, prices, and perceptions will adjust upward to this new price level.
The government must increase taxes to curb aggregate demand.
Nominal wages, prices, and perceptions will adjust downward to this new price level.
According to the sticky-wage theory of aggregate supply, nominal wages at the initial equilibrium are greater than nominal wages at the
short-run equilibrium, and equal to
nominal wages at the long-run equilibrium. Real wages at the initial equilibrium
are greater than nominal wages at the short-run equilibrium, and greater than nominal wages at the long-run equilibrium. Judging by the
impact of the money supply on nominal and real wages, this analysis is not consistent with the proposition that money has real effects in the
short run but is neutral in the long run.

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