Long run equilibrium in AD-AS model.

Question

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Answer 1

Question

Chapter 33, Problem 3PA

Subpart (a):

To determine

Long run equilibrium in AD-AS model.

Subpart (a):

Expert Solution

Explanation of Solution

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 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 equilibrium is a condition where the aggregate demand curve of the economy intersects with the aggregate supply curve of the economy. Then there will be an equilibrium point derived where the economy will be in its equilibrium without any excess demand or supply. The quantity on the X axis will represent the equilibrium quantity of the economy and the corresponding price on the Y axis represents the equilibrium price in the economy. One can represent the equilibrium of the economy with the help of AD1 and AS1 curves on the graph as follows:

Principles of Economics (MindTap Course List), Chapter 33, Problem 3PA

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (b):

To determine

Long run equilibrium in AD-AS model.

Subpart (b):

Expert Solution

Explanation of Solution

When the money supply of the economy increases with the intervention of the Central Bank of the economy, the money with the public will increase. When the money with the public increases, they will feel wealthier and as a result they will demand more consumer goods and services. As a result, the aggregate demand of the economy increases and it will shift the AD curve towards the right. This can be identified as the change to the equilibrium point B as shown in Figure 1. Thus, in short, the increase in the money supply leads to the increase in the output and price level of the economy.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (c):

To determine

Long run equilibrium in AD-AS model.

Subpart (c):

Expert Solution

Explanation of Solution

When the AD curve shifts towards the right and increases the output and the price level in the short run, over time, the nominal wages, prices as well as the perceptions and expectations of the economy would adjust to the new equilibrium level. As a result of this gradual adjustment, the cost of production will increase and the result will be a leftward shift in the aggregate supply curve of the economy. Then the economy will return to its natural level of output at a higher price level of the economy. This can be identified as the movement from point B to point C in the graph shown above.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (d):

To determine

Long run equilibrium in AD-AS model.

Subpart (d):

Expert Solution

Explanation of Solution

The sticky wages theory suggests that when there is inflation in the economy, the wage rate will adjust very slowly to the inflation. More or less the wage rates will be sticky and the main reason will be the long term contracts between the employer and the employees. Thus, in the short run equilibriums such as point A and point B, the wages of the economy would be more or less equal to each other. Whereas the point C represents the long run equilibrium and thus, the wages at the point C will be higher than that in point A and B.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (e):

To determine

Long run equilibrium in AD-AS model.

Subpart (e):

Expert Solution

Explanation of Solution

The sticky wages theory suggests that when there is inflation in the economy, the wage rate will adjust very slowly to the inflation. More or less, the wage rates will be sticky and the main reason will be the long term contracts between the employer and the employees. So, the nominal wages at equilibrium point A and B will be same. But the increase in the general price level in the economy would reduce the real wages of the workers because, the real wage is the nominal wage divided by the price level. When the denominator increases, it will reduce the value of the real wages in the economy.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Sub part (f):

To determine

Long run equilibrium in AD-AS model.

Sub part (f):

Expert Solution

Explanation of Solution

When the increase in the money supply happens in the economy, it will lead to the increase in the nominal wages as well as the price level in the economy in the long run. As a result of the increase in the nominal wage rate along with the price level in the economy, the real wage rate of the economy would remain unchanged. Thus, the neutrality of money applies in the long run equilibrium.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

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Students have asked these similar questions

What effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and the level of real output. Assume all other things remain constant.a. A widespread fear of depression on the part of consumers.b. A $2 increase in the excise tax on a pack of cigarettes.c. A reduction in interest rates at each price level.d. A major increase in Federal spending for health care.e. The expectation of rapid inflation.f. The complete disintegration of OPEC, causing oil prices to fall by one-half.g. A 10 percent reduction in personal income tax rates.h. A sizable increase in labor productivity (with no change in nominal wages).i. A 12 percent increase in nominal wages (with no change in productivity).j. Depreciation in the international value of the dollar.

Suppose an economy is in long-run equilibrium.a.Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium(call it point A).be sure to include both short-run and long-run aggregate supply.b.The central bank raise the money supply by 5 percent.Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium.(call it point B)c.Now slow the new long-run equilibrium(call it point C).what causes the economy to move from point B to point C?d.According to the sticky-wage theory of aggregate supply,how do nominal wages at point A compare to nominal wages at point B?How do nominal wages at point A compare to nominal wages at point C?e.According to the sticky wage theory of aggregate supply,how do real wages at point A compare to the real wages at point B?How do real wages at pointA compare to the real wages at point C?f.Judging by the impact of the money supply on nominal and real…

Starting from long run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and short run when there is a decline in wealth. Why does the economy move back to full employment?

Answer 2

Question

Chapter 33, Problem 3PA

Subpart (a):

To determine

Long run equilibrium in AD-AS model.

Subpart (a):

Expert Solution

Explanation of Solution

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 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 equilibrium is a condition where the aggregate demand curve of the economy intersects with the aggregate supply curve of the economy. Then there will be an equilibrium point derived where the economy will be in its equilibrium without any excess demand or supply. The quantity on the X axis will represent the equilibrium quantity of the economy and the corresponding price on the Y axis represents the equilibrium price in the economy. One can represent the equilibrium of the economy with the help of AD1 and AS1 curves on the graph as follows:

Principles of Economics (MindTap Course List), Chapter 33, Problem 3PA

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (b):

To determine

Long run equilibrium in AD-AS model.

Subpart (b):

Expert Solution

Explanation of Solution

When the money supply of the economy increases with the intervention of the Central Bank of the economy, the money with the public will increase. When the money with the public increases, they will feel wealthier and as a result they will demand more consumer goods and services. As a result, the aggregate demand of the economy increases and it will shift the AD curve towards the right. This can be identified as the change to the equilibrium point B as shown in Figure 1. Thus, in short, the increase in the money supply leads to the increase in the output and price level of the economy.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (c):

To determine

Long run equilibrium in AD-AS model.

Subpart (c):

Expert Solution

Explanation of Solution

When the AD curve shifts towards the right and increases the output and the price level in the short run, over time, the nominal wages, prices as well as the perceptions and expectations of the economy would adjust to the new equilibrium level. As a result of this gradual adjustment, the cost of production will increase and the result will be a leftward shift in the aggregate supply curve of the economy. Then the economy will return to its natural level of output at a higher price level of the economy. This can be identified as the movement from point B to point C in the graph shown above.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (d):

To determine

Long run equilibrium in AD-AS model.

Subpart (d):

Expert Solution

Explanation of Solution

The sticky wages theory suggests that when there is inflation in the economy, the wage rate will adjust very slowly to the inflation. More or less the wage rates will be sticky and the main reason will be the long term contracts between the employer and the employees. Thus, in the short run equilibriums such as point A and point B, the wages of the economy would be more or less equal to each other. Whereas the point C represents the long run equilibrium and thus, the wages at the point C will be higher than that in point A and B.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (e):

To determine

Long run equilibrium in AD-AS model.

Subpart (e):

Expert Solution

Explanation of Solution

The sticky wages theory suggests that when there is inflation in the economy, the wage rate will adjust very slowly to the inflation. More or less, the wage rates will be sticky and the main reason will be the long term contracts between the employer and the employees. So, the nominal wages at equilibrium point A and B will be same. But the increase in the general price level in the economy would reduce the real wages of the workers because, the real wage is the nominal wage divided by the price level. When the denominator increases, it will reduce the value of the real wages in the economy.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Sub part (f):

To determine

Long run equilibrium in AD-AS model.

Sub part (f):

Expert Solution

Explanation of Solution

When the increase in the money supply happens in the economy, it will lead to the increase in the nominal wages as well as the price level in the economy in the long run. As a result of the increase in the nominal wage rate along with the price level in the economy, the real wage rate of the economy would remain unchanged. Thus, the neutrality of money applies in the long run equilibrium.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

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Answer 3

Question

Chapter 33, Problem 3PA

Subpart (a):

To determine

Long run equilibrium in AD-AS model.

Subpart (a):

Expert Solution

Explanation of Solution

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 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 equilibrium is a condition where the aggregate demand curve of the economy intersects with the aggregate supply curve of the economy. Then there will be an equilibrium point derived where the economy will be in its equilibrium without any excess demand or supply. The quantity on the X axis will represent the equilibrium quantity of the economy and the corresponding price on the Y axis represents the equilibrium price in the economy. One can represent the equilibrium of the economy with the help of AD1 and AS1 curves on the graph as follows:

Principles of Economics (MindTap Course List), Chapter 33, Problem 3PA

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (b):

To determine

Long run equilibrium in AD-AS model.

Subpart (b):

Expert Solution

Explanation of Solution

When the money supply of the economy increases with the intervention of the Central Bank of the economy, the money with the public will increase. When the money with the public increases, they will feel wealthier and as a result they will demand more consumer goods and services. As a result, the aggregate demand of the economy increases and it will shift the AD curve towards the right. This can be identified as the change to the equilibrium point B as shown in Figure 1. Thus, in short, the increase in the money supply leads to the increase in the output and price level of the economy.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (c):

To determine

Long run equilibrium in AD-AS model.

Subpart (c):

Expert Solution

Explanation of Solution

When the AD curve shifts towards the right and increases the output and the price level in the short run, over time, the nominal wages, prices as well as the perceptions and expectations of the economy would adjust to the new equilibrium level. As a result of this gradual adjustment, the cost of production will increase and the result will be a leftward shift in the aggregate supply curve of the economy. Then the economy will return to its natural level of output at a higher price level of the economy. This can be identified as the movement from point B to point C in the graph shown above.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (d):

To determine

Long run equilibrium in AD-AS model.

Subpart (d):

Expert Solution

Explanation of Solution

The sticky wages theory suggests that when there is inflation in the economy, the wage rate will adjust very slowly to the inflation. More or less the wage rates will be sticky and the main reason will be the long term contracts between the employer and the employees. Thus, in the short run equilibriums such as point A and point B, the wages of the economy would be more or less equal to each other. Whereas the point C represents the long run equilibrium and thus, the wages at the point C will be higher than that in point A and B.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (e):

To determine

Long run equilibrium in AD-AS model.

Subpart (e):

Expert Solution

Explanation of Solution

The sticky wages theory suggests that when there is inflation in the economy, the wage rate will adjust very slowly to the inflation. More or less, the wage rates will be sticky and the main reason will be the long term contracts between the employer and the employees. So, the nominal wages at equilibrium point A and B will be same. But the increase in the general price level in the economy would reduce the real wages of the workers because, the real wage is the nominal wage divided by the price level. When the denominator increases, it will reduce the value of the real wages in the economy.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Sub part (f):

To determine

Long run equilibrium in AD-AS model.

Sub part (f):

Expert Solution

Explanation of Solution

When the increase in the money supply happens in the economy, it will lead to the increase in the nominal wages as well as the price level in the economy in the long run. As a result of the increase in the nominal wage rate along with the price level in the economy, the real wage rate of the economy would remain unchanged. Thus, the neutrality of money applies in the long run equilibrium.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

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Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 33, Problem 3PA

Subpart (a):

To determine

Long run equilibrium in AD-AS model.

Subpart (a):

Expert Solution

Explanation of Solution

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 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 equilibrium is a condition where the aggregate demand curve of the economy intersects with the aggregate supply curve of the economy. Then there will be an equilibrium point derived where the economy will be in its equilibrium without any excess demand or supply. The quantity on the X axis will represent the equilibrium quantity of the economy and the corresponding price on the Y axis represents the equilibrium price in the economy. One can represent the equilibrium of the economy with the help of AD1 and AS1 curves on the graph as follows:

Principles of Economics (MindTap Course List), Chapter 33, Problem 3PA

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (b):

To determine

Long run equilibrium in AD-AS model.

Subpart (b):

Expert Solution

Explanation of Solution

When the money supply of the economy increases with the intervention of the Central Bank of the economy, the money with the public will increase. When the money with the public increases, they will feel wealthier and as a result they will demand more consumer goods and services. As a result, the aggregate demand of the economy increases and it will shift the AD curve towards the right. This can be identified as the change to the equilibrium point B as shown in Figure 1. Thus, in short, the increase in the money supply leads to the increase in the output and price level of the economy.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (c):

To determine

Long run equilibrium in AD-AS model.

Subpart (c):

Expert Solution

Explanation of Solution

When the AD curve shifts towards the right and increases the output and the price level in the short run, over time, the nominal wages, prices as well as the perceptions and expectations of the economy would adjust to the new equilibrium level. As a result of this gradual adjustment, the cost of production will increase and the result will be a leftward shift in the aggregate supply curve of the economy. Then the economy will return to its natural level of output at a higher price level of the economy. This can be identified as the movement from point B to point C in the graph shown above.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (d):

To determine

Long run equilibrium in AD-AS model.

Subpart (d):

Expert Solution

Explanation of Solution

The sticky wages theory suggests that when there is inflation in the economy, the wage rate will adjust very slowly to the inflation. More or less the wage rates will be sticky and the main reason will be the long term contracts between the employer and the employees. Thus, in the short run equilibriums such as point A and point B, the wages of the economy would be more or less equal to each other. Whereas the point C represents the long run equilibrium and thus, the wages at the point C will be higher than that in point A and B.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (e):

To determine

Long run equilibrium in AD-AS model.

Subpart (e):

Expert Solution

Explanation of Solution

The sticky wages theory suggests that when there is inflation in the economy, the wage rate will adjust very slowly to the inflation. More or less, the wage rates will be sticky and the main reason will be the long term contracts between the employer and the employees. So, the nominal wages at equilibrium point A and B will be same. But the increase in the general price level in the economy would reduce the real wages of the workers because, the real wage is the nominal wage divided by the price level. When the denominator increases, it will reduce the value of the real wages in the economy.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Sub part (f):

To determine

Long run equilibrium in AD-AS model.

Sub part (f):

Expert Solution

Explanation of Solution

When the increase in the money supply happens in the economy, it will lead to the increase in the nominal wages as well as the price level in the economy in the long run. As a result of the increase in the nominal wage rate along with the price level in the economy, the real wage rate of the economy would remain unchanged. Thus, the neutrality of money applies in the long run equilibrium.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

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Answer 5

Chapter 33, Problem 3PA

Subpart (a):

To determine

Long run equilibrium in AD-AS model.

Subpart (a):

Expert Solution

Explanation of Solution

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 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 equilibrium is a condition where the aggregate demand curve of the economy intersects with the aggregate supply curve of the economy. Then there will be an equilibrium point derived where the economy will be in its equilibrium without any excess demand or supply. The quantity on the X axis will represent the equilibrium quantity of the economy and the corresponding price on the Y axis represents the equilibrium price in the economy. One can represent the equilibrium of the economy with the help of AD1 and AS1 curves on the graph as follows:

Principles of Economics (MindTap Course List), Chapter 33, Problem 3PA

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (b):

To determine

Long run equilibrium in AD-AS model.

Subpart (b):

Expert Solution

Explanation of Solution

When the money supply of the economy increases with the intervention of the Central Bank of the economy, the money with the public will increase. When the money with the public increases, they will feel wealthier and as a result they will demand more consumer goods and services. As a result, the aggregate demand of the economy increases and it will shift the AD curve towards the right. This can be identified as the change to the equilibrium point B as shown in Figure 1. Thus, in short, the increase in the money supply leads to the increase in the output and price level of the economy.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (c):

To determine

Long run equilibrium in AD-AS model.

Subpart (c):

Expert Solution

Explanation of Solution

When the AD curve shifts towards the right and increases the output and the price level in the short run, over time, the nominal wages, prices as well as the perceptions and expectations of the economy would adjust to the new equilibrium level. As a result of this gradual adjustment, the cost of production will increase and the result will be a leftward shift in the aggregate supply curve of the economy. Then the economy will return to its natural level of output at a higher price level of the economy. This can be identified as the movement from point B to point C in the graph shown above.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (d):

To determine

Long run equilibrium in AD-AS model.

Subpart (d):

Expert Solution

Explanation of Solution

The sticky wages theory suggests that when there is inflation in the economy, the wage rate will adjust very slowly to the inflation. More or less the wage rates will be sticky and the main reason will be the long term contracts between the employer and the employees. Thus, in the short run equilibriums such as point A and point B, the wages of the economy would be more or less equal to each other. Whereas the point C represents the long run equilibrium and thus, the wages at the point C will be higher than that in point A and B.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Subpart (e):

To determine

Long run equilibrium in AD-AS model.

Subpart (e):

Expert Solution

Explanation of Solution

The sticky wages theory suggests that when there is inflation in the economy, the wage rate will adjust very slowly to the inflation. More or less, the wage rates will be sticky and the main reason will be the long term contracts between the employer and the employees. So, the nominal wages at equilibrium point A and B will be same. But the increase in the general price level in the economy would reduce the real wages of the workers because, the real wage is the nominal wage divided by the price level. When the denominator increases, it will reduce the value of the real wages in the economy.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Sub part (f):

To determine

Long run equilibrium in AD-AS model.

Sub part (f):

Expert Solution

Explanation of Solution

When the increase in the money supply happens in the economy, it will lead to the increase in the nominal wages as well as the price level in the economy in the long run. As a result of the increase in the nominal wage rate along with the price level in the economy, the real wage rate of the economy would remain unchanged. Thus, the neutrality of money applies in the long run equilibrium.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Answer 6

Chapter 33, Problem 3PA

Subpart (a):

To determine

Long run equilibrium in AD-AS model.

Subpart (a):

Expert Solution

Explanation of Solution

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 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 equilibrium is a condition where the aggregate demand curve of the economy intersects with the aggregate supply curve of the economy. Then there will be an equilibrium point derived where the economy will be in its equilibrium without any excess demand or supply. The quantity on the X axis will represent the equilibrium quantity of the economy and the corresponding price on the Y axis represents the equilibrium price in the economy. One can represent the equilibrium of the economy with the help of AD1 and AS1 curves on the graph as follows:

Principles of Economics (MindTap Course List), Chapter 33, Problem 3PA

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Answer 7

Chapter 33, Problem 3PA

Subpart (a):

To determine

Long run equilibrium in AD-AS model.

Answer 8

Subpart (a):

Expert Solution

Explanation of Solution

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 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 equilibrium is a condition where the aggregate demand curve of the economy intersects with the aggregate supply curve of the economy. Then there will be an equilibrium point derived where the economy will be in its equilibrium without any excess demand or supply. The quantity on the X axis will represent the equilibrium quantity of the economy and the corresponding price on the Y axis represents the equilibrium price in the economy. One can represent the equilibrium of the economy with the help of AD1 and AS1 curves on the graph as follows:

Principles of Economics (MindTap Course List), Chapter 33, Problem 3PA

Answer 9

Subpart (a):

Expert Solution

Answer 10

Subpart (a):

Expert Solution

Answer 11

Expert Solution

Answer 12

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Answer 13

Subpart (b):

To determine

Long run equilibrium in AD-AS model.

Subpart (b):

Expert Solution

Explanation of Solution

When the money supply of the economy increases with the intervention of the Central Bank of the economy, the money with the public will increase. When the money with the public increases, they will feel wealthier and as a result they will demand more consumer goods and services. As a result, the aggregate demand of the economy increases and it will shift the AD curve towards the right. This can be identified as the change to the equilibrium point B as shown in Figure 1. Thus, in short, the increase in the money supply leads to the increase in the output and price level of the economy.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Answer 14

Subpart (b):

To determine

Long run equilibrium in AD-AS model.

Answer 15

Subpart (b):

Expert Solution

Explanation of Solution

When the money supply of the economy increases with the intervention of the Central Bank of the economy, the money with the public will increase. When the money with the public increases, they will feel wealthier and as a result they will demand more consumer goods and services. As a result, the aggregate demand of the economy increases and it will shift the AD curve towards the right. This can be identified as the change to the equilibrium point B as shown in Figure 1. Thus, in short, the increase in the money supply leads to the increase in the output and price level of the economy.

Answer 16

Subpart (b):

Expert Solution

Answer 17

Subpart (b):

Expert Solution

Answer 18

Expert Solution

Answer 19

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Answer 20

Subpart (c):

To determine

Long run equilibrium in AD-AS model.

Subpart (c):

Expert Solution

Explanation of Solution

When the AD curve shifts towards the right and increases the output and the price level in the short run, over time, the nominal wages, prices as well as the perceptions and expectations of the economy would adjust to the new equilibrium level. As a result of this gradual adjustment, the cost of production will increase and the result will be a leftward shift in the aggregate supply curve of the economy. Then the economy will return to its natural level of output at a higher price level of the economy. This can be identified as the movement from point B to point C in the graph shown above.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Answer 21

Subpart (c):

To determine

Long run equilibrium in AD-AS model.

Answer 22

Subpart (c):

Expert Solution

Explanation of Solution

When the AD curve shifts towards the right and increases the output and the price level in the short run, over time, the nominal wages, prices as well as the perceptions and expectations of the economy would adjust to the new equilibrium level. As a result of this gradual adjustment, the cost of production will increase and the result will be a leftward shift in the aggregate supply curve of the economy. Then the economy will return to its natural level of output at a higher price level of the economy. This can be identified as the movement from point B to point C in the graph shown above.

Answer 23

Subpart (c):

Expert Solution

Answer 24

Subpart (c):

Expert Solution

Answer 25

Expert Solution

Answer 26

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Answer 27

Subpart (d):

To determine

Long run equilibrium in AD-AS model.

Subpart (d):

Expert Solution

Explanation of Solution

The sticky wages theory suggests that when there is inflation in the economy, the wage rate will adjust very slowly to the inflation. More or less the wage rates will be sticky and the main reason will be the long term contracts between the employer and the employees. Thus, in the short run equilibriums such as point A and point B, the wages of the economy would be more or less equal to each other. Whereas the point C represents the long run equilibrium and thus, the wages at the point C will be higher than that in point A and B.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Answer 28

Subpart (d):

To determine

Long run equilibrium in AD-AS model.

Answer 29

Subpart (d):

Expert Solution

Explanation of Solution

The sticky wages theory suggests that when there is inflation in the economy, the wage rate will adjust very slowly to the inflation. More or less the wage rates will be sticky and the main reason will be the long term contracts between the employer and the employees. Thus, in the short run equilibriums such as point A and point B, the wages of the economy would be more or less equal to each other. Whereas the point C represents the long run equilibrium and thus, the wages at the point C will be higher than that in point A and B.

Answer 30

Subpart (d):

Expert Solution

Answer 31

Subpart (d):

Expert Solution

Answer 32

Expert Solution

Answer 33

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Answer 34

Subpart (e):

To determine

Long run equilibrium in AD-AS model.

Subpart (e):

Expert Solution

Explanation of Solution

The sticky wages theory suggests that when there is inflation in the economy, the wage rate will adjust very slowly to the inflation. More or less, the wage rates will be sticky and the main reason will be the long term contracts between the employer and the employees. So, the nominal wages at equilibrium point A and B will be same. But the increase in the general price level in the economy would reduce the real wages of the workers because, the real wage is the nominal wage divided by the price level. When the denominator increases, it will reduce the value of the real wages in the economy.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Answer 35

Subpart (e):

To determine

Long run equilibrium in AD-AS model.

Answer 36

Subpart (e):

Expert Solution

Explanation of Solution

The sticky wages theory suggests that when there is inflation in the economy, the wage rate will adjust very slowly to the inflation. More or less, the wage rates will be sticky and the main reason will be the long term contracts between the employer and the employees. So, the nominal wages at equilibrium point A and B will be same. But the increase in the general price level in the economy would reduce the real wages of the workers because, the real wage is the nominal wage divided by the price level. When the denominator increases, it will reduce the value of the real wages in the economy.

Answer 37

Subpart (e):

Expert Solution

Answer 38

Subpart (e):

Expert Solution

Answer 39

Expert Solution

Answer 40

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Answer 41

Sub part (f):

To determine

Long run equilibrium in AD-AS model.

Sub part (f):

Expert Solution

Explanation of Solution

When the increase in the money supply happens in the economy, it will lead to the increase in the nominal wages as well as the price level in the economy in the long run. As a result of the increase in the nominal wage rate along with the price level in the economy, the real wage rate of the economy would remain unchanged. Thus, the neutrality of money applies in the long run equilibrium.

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.

Answer 42

Sub part (f):

To determine

Long run equilibrium in AD-AS model.

Answer 43

Sub part (f):

Expert Solution

Explanation of Solution

When the increase in the money supply happens in the economy, it will lead to the increase in the nominal wages as well as the price level in the economy in the long run. As a result of the increase in the nominal wage rate along with the price level in the economy, the real wage rate of the economy would remain unchanged. Thus, the neutrality of money applies in the long run equilibrium.

Answer 44

Sub part (f):

Expert Solution

Answer 45

Sub part (f):

Expert Solution

Answer 46

Expert Solution

Answer 47

Economics Concept Introduction

Concept introduction:

Aggregate demand curve: It is the curve which shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms as well as the government.

Aggregate supply curve: In the short run, it is a curve which shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.

Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersects with each other. There will be no excess demand or excess supply in the economy at the equilibrium.