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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment.

a. Draw an aggregate-demand/aggregate-supply diagram to show the short-run effect of this optimism on the economy Label the new levels of prices and real output. supplied changes.

b. Now use the diagram from part (a) to show the new long-run equilibrium of the economy. (For now, assume there is no change in the long-run aggregate-supply curve.) Explain in words why the aggregate quantity of output demanded changes between the short run and the long run.

c. How might the investment boom affect the long-run aggregate-supply curve? Explain.

Sub part (a):

To determine

The impact of optimistic future expectations by the firms in the economy.

Explanation

The supply depends upon the price level in the economy. When the price level is higher, the suppliers will be receiving higher income, and this would incentivize them to increase the supply in the economy and vice versa. The aggregation of the supply curves of all the firms in the economy is known as the aggregate supply curve. In the short run period, the aggregate supply curve represents the relationship between the price level in the economy and the supply by the firms.

The demand comes from all the economic agents such as the households, firms, and the government. The demand depends on the price level of the economy. The increase and decrease in the price level determine the level of demand in the economy. The aggregation of all the individual demands in the economy is known as the aggregate demand; thus, the aggregate demand explains the relationship between the general price level and the level of real GDP demanded in the economy by the economic agents such as the households, firms, and the government.

The future expectations are very important factors that determine the level of investment as well as the level of output in the economy...

Sub part (b):

To determine

The impact of optimistic future expectations by the firms in the economy.

Sub part (c):

To determine

The impact of optimistic future expectations by the firms in the economy.

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