Macroeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506756
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Question
Chapter 10, Problem 8CQ
To determine
Identify the self-correcting mechanism to direct the economy to offset the long-run equilibrium.
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How do Keynesians and classicals differ in their beliefs about how long it takes the economy to reach long-run equilibrium? What implications do these differences in beliefs have for Keynesian and classical views about the usefulness of antirecessionary policies? About the types of shocks that cause most recessions?
Suppose the economy is initially at K. Which of the following statements best explains how the economy responds to restore long-run macroeconomic equilibrium?
Select one:
a. Over time, the aggregate demand curve will shift to the right until long-run equilibrium is restored at J and the gap is closed.
b. Rising unemployment puts pressure on nominal wages to fall. The SRAS curve shifts right to SRAS1 closing the gap at H.
c. In response to rising prices, firms will increase production moving along SRAS2 until long- run equilibrium is restored at J and the gap is closed.
d. Rising unemployment puts pressure on nominal wages to fall. Firms employ more workers moving along SRAS2 until long-run equilibrium is restored at J and the gap is closed.
Suppose an economy is at the short run equilibrium which its current output level called Y1, is below the full employment output level called Yf. If the government does nothing, discuss how the economy restores its long run equilibrium level of output?
Chapter 10 Solutions
Macroeconomics: Private and Public Choice (MindTap Course List)
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Similar questions
- Suppose the economy is operating at potential GDP when it experiences an increase in export demand. How might the economy increase production of exports to meet this demand, given that the economy is already at full employment?arrow_forwardWhat would a Keynesian likely recommend in response to a recession? What would a neoclassical likely recommend? Why would a Keynesian policy response not make much sense in response to a minor recession like the one that occurred in 1990? What would be the cost of letting the economy adjust by itself to a new long run equilibrium?arrow_forwardWhich of the following describes the use of Keynesian macroeconomic policy to resolve an inflationary gap problem in the economy? a) Unemployment, resulting from the short-run product markets equilibrium being below Long-run Aggregate Supply (LRAS), causes wages to decline, which increases short-run Aggregate Supply (AS), until long-run equilibrium is attained at full employment level of income and a lower price level. b) Government spending is increased, increasing Aggregate Demand (AD) to a level sufficient to attain long-run equilibrium at full employment level of income and a higher price level. c) In attempting to produce beyond the economy's natural level of GDP, producers bid up wages and prices of other resources, causing the short-run Aggregate Supply (AS) to decrease to the point where long-run equilibrium is restored. d) Taxes are increased reducing Aggregate Demand (AD) to a level consistent with full employment.arrow_forward
- According to classical economic theory, which of the following describes the potential long-run self-correction of the economy depicted in the graph above? a. Consumption will come out of its stagnation and shift AD to the right, bringing output back to full employment levels. b. Wage rates will increase, attracting labor back to full employment levels ans increasing output back to its natural rate. c. Long-run aggregate supply will shift left due to decreases in spending and restore long-run equilibrium. d. Nominal wages will decrease as the duration of unemployment extends, eventually shifting short-run aggregate supply to the right, bringing output back to its natural level. e. Economies do not self-correct.arrow_forwardSuppose a country's potential level of output is $90 billion. A decrease in total spending causes aggregate demand to decrease, and output is now $75 billion. What is the country's level of output in the short run? (Answer in billions.) $______arrow_forwardThe demand for Home output from foreign countries increased in an economy which was initially in the long-run equilibrium. In the short-short-run, the economy deviated from its full employment output level. After that, in the long-run, which curve (AD, SRAS, or LRAS) would shift to direction (Left or Right)? Curve: Direction:arrow_forward
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