Suppose the economy is initially at point 1 on the following graph and that the Fed increases the money supply. Suppose also that individuals hold rational expectations, prices and wages are flexible, and individuals overestimate the increase in aggregate demand (blas upward). On the following graph, use the black point (cross symbol) to show the short-run equilibrium. Then use the grey point (star symbol) to show the long- run equilibrium. PRICE LEVEL 112 106 100 In the short run, the price level GDP is LRAS Natural Real GDR GRAS GRAS AD AD , and Real GDP is Short Run Equlonum ☀ Long Run Equbrum Natural Real GDR. In the long run, the price level is and Real

Suppose the economy is initially at point 1 on the following graph and that the Fed increases the money supply. Suppose also that individuals hold rational expectations, prices and wages are flexible, and individuals overestimate the increase in aggregate demand (blas upward). On the following graph, use the black point (cross symbol) to show the short-run equilibrium. Then use the grey point (star symbol) to show the long- run equilibrium. PRICE LEVEL 112 106 100 In the short run, the price level GDP is LRAS Natural Real GDR GRAS GRAS AD AD , and Real GDP is Short Run Equlonum ☀ Long Run Equbrum Natural Real GDR. In the long run, the price level is and Real

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter9: Classical Macroeconomics And The Self Regulating Economy

Section: Chapter Questions

Problem 14QP

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The following graph plots aggregate demand (AD2027AD2027) and aggregate supply (AS) for the imaginary country of Cotopaxi in the year 2027. Suppose the natural level of output in this economy is $6 trillion. On the following graph, use the green line (triangle symbol) to plot the long-run aggregate supply (LRAS) curve for this economy. Economists forecast that if the government takes no action and the economy continues to grow at the current rate, aggregate demand in 2028 will be given by the curve labeled ADAADA, resulting in the outcome given by point A. If, however, the government pursues an expansionary policy, aggregate demand in 2028 will be given by the curve labeled ADBADB, resulting in the outcome given by point B. The following table presents projections for the unemployment rates that would occur at point A and point B. Consider the potential rate of inflation between 2027 and 2028, depending on whether the economy moves from the initial price level of 102 to the…
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Assume that the housing market is in equilibrium in year 1. In year 2, the mortgage rate that banks charge consumers decreases, but producers are not affected. Also in year 2, the cost of lumber used to build homes decreases. Which of the following is most likely to be the equilibrium change? a The equilibrium will be at point C before the change in expectations and point B after the change b The equilibrium will be at point A before the change in expectations and point B after the change c The equilibrium will be at point A before the change in expectations and point E after the change d The equilibrium will be at point E before the change in expectations and point A after the change
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Consider the graph below. Assume that, initially, an economy has long-run aggregate supply corresponding to LRAS, short-run supply corresponding to SRAS₁, and aggregate demand corresponding to AD₁. Where will the new equilibrium be in the short run if income tax hikes cause workers to lower their expectations of future income? (Do not assume that all curves shown actually come into play.) Price level (P) 100 95 90 Click or tap the appropriate place in the image. LRAS SRAS SRAS AD₁ AD₁ Real GDP (Y)
As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices. Starting from a long-run equilibrium, illustrate the effects of these two changes on aggregate supply and aggregate demand on the following graph. Then, on the subsequent graph, indicate what happens on a Phillips-curve diagram. Price Level Inflation Rate LRAS Aggregate Supply LRPC Aggregate Demand Quantity of Output Unemployment Rate SRPC Aggregate Demand Aggregate Supply LRAS Long-run Equilibrium SRPC LRPC + Long-Run Equilibrium
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