MACROECONOMICS (LL)
21st Edition
ISBN: 9781260186949
Author: McConnell
Publisher: MCG
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Chapter 18, Problem 1P
To determine
Real output for different price levels in the short run and the longrun.
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A) What are the equilibrium price level and the equilibrium level of real output in this hypothetical economy?
Is the equilibrium real output also necessarily the full-employment real output?
B)If the price level in this economy is 150, will quantity demanded equal, exceed, or fall short of quantity supplied? By what amount?
If the price level is 250, will quantity demanded equal, exceed, or fall short of quantity supplied? By what amount?
C) Suppose that buyers desire to purchase $ 200 billion of extra real output at each price level. What are the new equilibrium price level and level of real output?
Suppose the full-employment level of real output ( Q) for a hypothetical economy is $250 and the price level (P ) initially is 100. Use the short-run aggregate supply schedules below to answer the questions that follow: a. What will be the level of real output in the short run if the price level unexpectedly rises from 100 to 125 because of an increase in aggregate demand? What if the price level unexpectedly falls from 100 to 75 because of a decrease in aggregate demand? Explain each situation, using figures from the table.b. What will be the level of real output in the long run when the price level rises from 100 to 125? When it falls from 100 to 75? Explain each situation.c. Show the circumstances described in parts a and b on graph paper, and derive the long-run aggregate supply curve.
Suppose that the aggregate demand and aggregate supply schedules for a hypothetical economy are as shown below: a. Use these sets of data to graph the aggregate demand and aggregate supply curves. What is the equilibrium price level and the equilibrium level of real output in this hypothetical economy? Is the equilibrium real output also necessarily the full-employment real output? Explain.b. Why will a price level of 150 not be an equilibrium price level in this economy? Why not 250?c. Suppose that buyers desire to purchase $200 billion of extra real output at each price level. Sketch in the new aggregate demand curve as AD1. What factors might cause this change in aggregate demand? What is the new equilibrium price level and level of real output?
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- Suppose the economy is in long-run equilibrium. If there is a sharp increase in the price of a critically important resource that is used in an economy such as oil and higher expected inflation while, at the same time, consumers become increasingly confident about their employment prospects and businesses more optimistic regarding the profitability of their investments, then we would expect that in the short-run, A. the price level will fall, and real GDP might rise, fall, or stay the same B. real GDP will fall and the price level might rise, fall, or stay the same. C. the price level will rise, and real GDP might rise, fall, or stay the same. D. real GDP will rise and the price level might rise, fall, or stay the same.arrow_forward2.3. In macroeconomics, the immediate short run is known as a length of time when both input prices and output prices are fixed. In the short-run, input prices are fixed but output prices are variable. In the long run, input prices and output prices can vary. What happens in the immediate short-run when AD rises from AD to AD2 to the price level and output? What happens in the short-run when AD falls from AD to AD1 to the price level and output? What will happen in each case in the long-run?arrow_forwardStart at full-employment (FE) equilibrium with flexible wages and worker misperception of price level changes in the short run. Suppose then that we have an increase in Aggregate Demand. First, think about the short-run effects on price level (P), output level (Q), wage level (W), employment (L), and unemployment (U)? In the long run, once workers realize that there was a change in the price level, they will change the supply curve of labor. When all subsequent wage and price adjustments take place, we will be in a new long-run equilibrium. From the original full-employment (FE) equilibrium to the final one, what is the net change in the price level (P), output level (Q), the nominal wage (W), employment (L), unemployment rate (U), and the real wage (W/P)? Group of answer choices a) An increase in P, no change in Q, no change in W, an increase in L, an increase in U and no change in W/P. b) An increase in P, a decrease in Q, a decrease in W, a decrease in L, an…arrow_forward
- Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run?a. An increase in aggregate demand.b. A decrease in aggregate supply, with no change in aggregate demand.c. Equal increases in aggregate demand and aggregate supply.d. A decrease in aggregate demand.e. An increase in aggregate demand that exceeds an increase in aggregate supply.arrow_forwardSuppose the aggregate demand (AD) and short-run aggregate supply (AS) schedules for an economy whose potential GDP (LRAS) equals to $2,700 are given by the table. Now suppose aggregate demand increases by $700 at each price level; for example, the new aggregate demanded at a price level of 50 now equals to $4,200. How will the shift in AD change the original output, price level, and employment? Name one factor that can cause the increase in aggregate demand and the shifting of the curve.arrow_forwardSuppose the aggregate demand (AD) and short-run aggregate supply (AS) schedules for an economy whose potential GDP (LRAS) equals to $2,700 are given by the table. 1.According to the macroeconomic perspectives, which zone is the short-run equilibrium falling into? 2.Would you expect unemployment rate of this economy to be relatively high or low, and explain why? What about the price level, a large or small concern, and why? 3. Now suppose aggregate demand increases by $700 at each price level; for example, the new aggregate demanded at a price level of 50 now equals to $4,200. Add a column of the new aggregate demanded at each price level in the above table. Plot a new AD curve (on the same graph you got in a.) and label the new equilibrium on the same graph.arrow_forward
- Table 24.4 describes Santhers economy. Plot the AD/AS curves and identify the equilibrium. Would you expect unemployment in this economy to be relatively high or low? Would you expect prices to be a relatively large or small concern for this economy? Imagine that input prices fall and so AS shifts to the right by 150 units. Identify the new equilibrium. How will the shift in AS affect the original output, price level, and employment?arrow_forwardSuppose that the economy's long-run output level is produces accourding to the following production funciton: Y= AK^1/2L^1/2 (will attach picture of the function) and that A = 5, K = 400 and L = 100 A. What is the economic meaning of the powers of K and L? B. What is the level of output ? produced when the economy in long-run equilibrium. C. Suppose that aggregate demand in the economy is described by the following equation:Y^d = m/kP Where M is the money supply, P is the price level and k = 1/V (velocity of money). Explain carefully where this equation is derived from and its interpretation D. Suppose that M = 2000 and that k = 2. What is the price level P at which the economy is in long-run- equilibrium? Plot such an equilibrium on a diagram with P on the vertical axis and Y on the horizontal axis, by distinguishing between the short-run and the long-run equilibrium. E. Now suppose that starting from the equilibrium of (b) and (c), the Central Bank increases M to 3000. Calculate…arrow_forwardQ.3 - Oil prices and the macroeconomy Assume that the economy starts at the natural level of output. Now suppose there is a permanent increase in the relative price of oil. a. Using the wage-setting and price-setting diagram (and explaining the intuition of the curves), show what happens to the unemployment rate in the medium run. Why does this happen? b. Assuming a simple production function, Y=N, where Y is output and N is employment, explain what happens to mediumrun equilibrium output. c. Assume the central bank has an inflation target. In an AS−AD diagram (explaining what lies behind the curves), show what happens to output and inflation in the short run and the medium run.arrow_forward
- Assume that (a)the price level is flexible upward but not downward and (b) the economy iscurrently operating at its full-employment output. Other things equal, how willeach of the following affect the equilibrium price level and equilibrium levelof real output in the short run?· An increase in aggregate demand.· A decrease in aggregate supply, with no change in aggregatedemand.· Equal increases in aggregate demand and aggregate supply.· A decrease in aggregate demand.· An increase in aggregate demand that exceeds an increase inaggregate supply.arrow_forwardAssume that the macro-economy is initially in short -run equilibrium. What happens to the equilibrium price level and equilibrium level of real GDP if interest rates in the economy fall? Question 4 options: a) Both the equilibrium price level and the equilibrium level of real GDP decrease. b) The equilibrium price level increases and the equilibrium level of real GDP decreases. c) Both the equilibrium price level and the equilibrium level of real GDP increase. d) The equilbrium price level falls and the equilibrium level of real GDP increases.arrow_forwardSuppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in taxes, then in the short run, real GDP will a. rise and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be unaffected. b. fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be unaffected. c. rise and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower. d. fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower.arrow_forward
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