Suppose the economy is in a long-run equilibrium, as shown in the following graph. Now suppose that firms become pessimistic about future business conditions and decide to cut back on investment spending, resulting in a fall in aggregate demand. Use your diagram to show what happens to output and the price level in the short run. LRAS Aggregate Supply Aggregate Demand Aggregate Supply LRAS Aggregate Demand Quantity of Output As a result of this change, the unemployment rate Use the sticky-wage theory of aggregate supply to think about what will happen to output and the price level in the long run (assuming there is no change in policy). Price Level

Suppose the economy is in a long-run equilibrium, as shown in the following graph. Now suppose that firms become pessimistic about future business conditions and decide to cut back on investment spending, resulting in a fall in aggregate demand. Use your diagram to show what happens to output and the price level in the short run. LRAS Aggregate Supply Aggregate Demand Aggregate Supply LRAS Aggregate Demand Quantity of Output As a result of this change, the unemployment rate Use the sticky-wage theory of aggregate supply to think about what will happen to output and the price level in the long run (assuming there is no change in policy). Price Level

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter8: Macroeconomic Equilibrium: Aggregate Demand And Supply

Section: Chapter Questions

Problem 20E

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Assume an economy operates in the intermediate range of its aggregate supplycurve. For each of the following changes in conditions, state the direction of theeffect on: aggregate demand, aggregate supply, price level, real GDP.(a) A decrease in government expenditure in infrastructure(b) A severe recession occurs in a country which has been a major importer of thenation’s exports.(c) The federal government increases business taxes with diagram
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The following graph shows the aggregate demand curve (ADAD), the short-run aggregate supply curve (ASAS), and the long-run aggregate supply curve (LRASLRAS) for a hypothetical economy. Initially, the expected price level equals the actual price level, and the economy experiences long-run equilibrium at a natural level of output of $120 billion. Suppose war in the world's main oil-producing region sharply reduces the world oil supply, causing oil prices to rise and increasing the costs of producing goods and services. Use the graph to help you answer the questions about the short-run and long-run effects of the increase in production costs that follow. (Note: You will not be graded on any adjustments made to the graph.) Hint: For simplicity, ignore any possible impact of the higher oil prices on the natural level of output. The short-run economic outcome resulting from the increase in production costs is known as (hyperinflation/stagflation/monetary neutrality/deflation) .…
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