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Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364

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BuyFindarrow_forward

Principles of Economics 2e

2nd Edition
Steven A. Greenlaw; David Shapiro
ISBN: 9781947172364
Textbook Problem

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?

To determine

Increase in demand even when economy is at its full employment level.

Explanation

In the given situation, following options can be executed:

Extra production can be increased by increasing workers time of work.

Outsourcing of production to low cost economy so that goods can be produced.

According to Keynesian theory, full employment occurs when a all the resources ate fully employed and there is no further scope for more production even if effective demand increases.

In the above diagram, SRAS is vertical, which shows economy cannot produce beyond such a point.

Any shift in AD curve from AD0 to AD1, will decrease only output level (REAL GDP) but not price...

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