Answered: The following graph shows a…

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter10: Dynamic Change, Economic Fluctuations, And The Ad-as Model

Section: Chapter Questions

Problem 2CQ

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Question

The following graph shows a hypothetical economy in long-run equilibrium at an expected price level of 120 and a natural output level of $600 billion. Suppose firms become pessimistic about future business conditions and cut back on investment spending.

Using the graph, shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the business pessimism.

In the short run, the decrease in investment spending associated with business pessimism causes the price level to (rise above/fall below) the price level people expected and the quantity of output to (rise above/fall below) the natural level of output. The business pessimism will cause the unemployment rate to (rise above/fall below) the natural rate of unemployment in the short run.

Again, the following graph shows a hypothetical economy experiencing long-run equilibrium at the expected price level of 120 and natural output level of $600 billion, prior to the decrease in investment spending associated with business pessimism.

Along the transition from the short run to the long run, price-level expectations will (adjust upward/adjust downward/remain the same) and the (aggregate demand/short run aggregate supply) curve will shift to the (left/right).

Using the graph, illustrate the long-run impact of the business pessimism by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve in the appropriate directions.

In the long run, due to the business pessimism, the price level (increases/decreases/remains the same) , the quantity of output (exceeds/returns to/falls short of) the natural level of output, and the unemployment rate (exceeds/returns to/falls short of) the natural rate.

Using the graph, shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the business
pessimism.
PRICE LEVEL
240
200
160
120
80
40
0
0
200
400
600
800
OUTPUT (Billions of dollars)
AS
AD
1000
1200
AD
AS
?

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