Economics For Today
10th Edition
ISBN: 9781337613040
Author: Tucker
Publisher: Cengage Learning
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Question
Chapter 20.A, Problem 5SQP
To determine
Long-run adjustment process in the economy.
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Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment.
(a) Draw an AD-AS diagram to show the short-run effect of this optimism on the economy. Label the new levels of prices and output.
(b) Use the diagram from part (a) to show the new long-run equilibrium of the economy. Explain in words why how the new long-run equilibrium is achieved.
Long-run macroeconomic equilibrium occurs when the aggregate demand curve
the short-run aggregate supply curve, and they
the long-run supply
curve.
A) is flatter than; intersect at a point to the right of
B) intersects; intersect at a point to the right of
C) is steeper than; intersect at a point to the left of
D) intersects; intersect at a point on
A recessionary gap exists when the macro economy is in equilibrium at less than the potential output of the the economy because aggregate demand is insufficient to fully employ all of society' s resources. In other words, the equilibrium (AD = AS) occurs to the left of the vertical long-run supply curve. At this point, potential output is reached ( full employment) and if any unemployment occurs, then it is due to structural or frictional; that is, the economy is at its natural rate of employment.
True or falses
Chapter 20 Solutions
Economics For Today
Ch. 20.7 - Prob. 1YTECh. 20.A - Prob. 1SQPCh. 20.A - Prob. 2SQPCh. 20.A - Prob. 3SQPCh. 20.A - Prob. 4SQPCh. 20.A - Prob. 5SQPCh. 20.A - Prob. 6SQPCh. 20.A - Prob. 1SQCh. 20.A - Prob. 2SQCh. 20.A - Prob. 3SQ
Ch. 20.A - Prob. 4SQCh. 20.A - Prob. 5SQCh. 20.A - Prob. 6SQCh. 20.A - Prob. 7SQCh. 20.A - Prob. 8SQCh. 20.A - Prob. 9SQCh. 20.A - Prob. 10SQCh. 20.A - Prob. 11SQCh. 20.A - Prob. 12SQCh. 20.A - Prob. 13SQCh. 20.A - Prob. 14SQCh. 20.A - Prob. 15SQCh. 20.A - Prob. 16SQCh. 20.A - Prob. 17SQCh. 20.A - Prob. 18SQCh. 20.A - Prob. 19SQCh. 20.A - Prob. 20SQCh. 20 - Prob. 1SQPCh. 20 - Prob. 2SQPCh. 20 - Prob. 3SQPCh. 20 - Prob. 4SQPCh. 20 - Prob. 5SQPCh. 20 - Prob. 6SQPCh. 20 - Prob. 7SQPCh. 20 - Prob. 8SQPCh. 20 - Prob. 9SQPCh. 20 - Prob. 10SQPCh. 20 - Prob. 11SQPCh. 20 - Prob. 1SQCh. 20 - Prob. 2SQCh. 20 - Prob. 3SQCh. 20 - Prob. 4SQCh. 20 - Prob. 5SQCh. 20 - Prob. 6SQCh. 20 - Prob. 7SQCh. 20 - Prob. 8SQCh. 20 - Prob. 9SQCh. 20 - Prob. 10SQCh. 20 - Prob. 11SQCh. 20 - Prob. 12SQCh. 20 - Prob. 13SQCh. 20 - Prob. 14SQCh. 20 - Prob. 15SQCh. 20 - Prob. 16SQCh. 20 - Prob. 17SQCh. 20 - Prob. 18SQCh. 20 - Prob. 19SQCh. 20 - Prob. 20SQ
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- A recessionary gap exists when the macro economy is in equilibrium at less than the potential output of the the economy because aggregate demand is insufficient to fully employ all of society' s resources. In other words, the equilibrium (AD = AS) occurs to the left of the vertical long-run supply curve. At this point, potential output is reached ( full employment) and if any unemployment occurs, then it is due to structural or frictional; that is, the economy is at its natural rate of employment. True Falsearrow_forwardIf aggregate supply is vertical, then which of the following statements must be true? Aggregate demand does not affect the quantity of output. Inflation creates greater social benefits. Inflation will accompany any rise in output. Aggregate demand does not cause inflationary changes in price level.arrow_forwardThe long-run aggregate supply curve shifts right if Answer immigration from abroad increases. the capital stock increases. technology advances. All of the above are correct.arrow_forward
- Which statement about short-run aggregate supply is the most accurate? It is not affected in any manner by the price level. It reflects how much real GDP suppliers are willing and able to produce at different price levels. It shifts only when the employment levels increase. It is set at the natural rate of unemployment.arrow_forwardRefer to the diagram above to answer the questions below: a) Is the economy in long-run macroeconomic equilibrium at point A? Explain. b) Explain a factor other than a large increase in demand for exports on why the Aggregate demand (AD) curve shifts to the right from AD1 to AD2. c) What happens to unemployment and price level at point B when compared to point A? d) Explain how does the economy eventually adjusts back to long run equilibrium to point C? Also, comment on what happens to real GDP, unemployment and price level as point C when compared to point A.arrow_forwardRefer to the diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply curve is AS1. Assuming no change in aggregate demand, the long-run response to a recession caused by cost-push inflation is best depicted as a: A) rightward shift of the aggregate supply curve from AS2 to AS1. B) leftward shift of the aggregate supply curve from AS1 to AS2. C) move from a to d along the long-run aggregate supply curve. D) move from a to c to d.arrow_forward
- The graph on the right shows a basic aggregate demand and aggregate supply graph (with LRAS constant) that shows the economy in long-run equilibrium at point A. Assume that there is an unexpected increase in the price of oil. 1.) Use the line drawing tool to show the resulting short-run equilibrium on your graph. Label any new aggregate demand or aggregate supply curve as AD2, SRAS2 or LRAS2 as appropriate 2) Use the point drawing tool to locate the new short-run equilibrium point Label this point B Carefully follow the instructions above, and only draw the required objects Price level (GDP Deflator, 2005 = 100) LRAS₁ A SRAS₁ Real GDP (trillions of 2005 dollars) AD1arrow_forwardWhich of these does NOT cause shifts in short run aggregate supply (SRAS)? Nominal wages Firms' stock prices Commodity prices Productivity (output per worker)arrow_forwardAssume that the economy is in a full employment equilibrium. There is an improvement in overall technology for all firms. The following combination of events are likely to occur a output rises, prices fall b output falls, prices rise . c output rises, prices rise d output falls, prices fallarrow_forward
- A vertical aggregate supply graph indicates that aggregate demand has no effect on: A) Prices B) Inflation C) Wages D) Quantity of outputarrow_forwardAssume that the United States economy is currently in a recession in a short-run equilibrium. Draw a correctly labeled graph of aggregate demand and aggregate supply in the recession and show each of the following. The current equilibrium output and price levels, labeled Ye and PLe, respectively.arrow_forwardA long-run equilibrium occurs when aggregate demand and aggregate supply are in equilibrium ____ a) below potential output b) at potential output c) above potential output d) at any level of outputarrow_forward
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