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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

A change in the expected price level shifts

a. the aggregate-demand curve.

b. the short-run aggregate-supply curve, but not the long-run aggregate-supply curve.

c. the long-run aggregate-supply curve, but not the short-run aggregate-supply curve.

d. both the short-run and the long-run aggregate-supply curves.

To determine

The impact of change in expected price level.

Explanation

The demand comes from all the economic agents such as the households, firms as well as the government. The demand depends on the price level of the economy. The increase and decrease in the price level determines 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 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.

Option (b):

The change in the expected price level is very important for the firms in the economy. In the short run, when the expected future price level is higher, the firms will reduce the aggregate supply in the present. Whereas when the expected price level is lower, the firms will increase their supply which increases the aggregate supply of the economy. In the long run, the changes in the expected price level will not affect the aggregate supply because the period will be long enough to materialize the expected and actual price levels. So, option 'b' is correct.

Option (a):

The change in the expected price level is very important for the firms in the economy...

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