PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 12, Problem 4RQ
To determine

Effects of recession in the natural rate of unemployment, cyclical unemployment, inflation rate, and the poll ratings of a president.

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If a firm believes that their relative price has changed, then they will increase their output, since their product is more valuable (in relative price terms). Thus, the output of firms will be Y = Y +x (P - EP) where alpha is the relative increase in work driven by an increase in expected price level Thirty percent of firms can adjust their prices ex-post. If a=1, and the current price level is $200, then draw the SRAS curve around the potential output of $10,000. Then, determine the increase in price above expectation if 40% of firms are sticky-price firms, flexible price firms respond with a=0.02 and Y rises by $2400.
Recent data from the Bureau of Labor Statistics show that the average price level for consumers rose 5.4% over the past year. While some are expressing concern over rising inflation leading the economy to “overheat,” there is some evidence indicating that this is due to the reopening of the economy as producers adjust to rising demand for goods and services. Many of the goods with the largest price increases, like bacon or cars and trucks, cannot have their production ramped up as quickly as demand is increasing. Other industries are facing supply chain challenges, like shortages of truck drivers. These problems are most likely to be short term, so, as supply catches up with demand, we can expect to see prices return to normal. As evidence, after spiking to record highs in early summer, lumber prices have now fallen below their price at the start of the year. The reason for the dramatic price increase earlier in the year was a combination of reduced supply in 2019 and a surge in demand…
Explain, using the AD-AS model, the effect of an increase in investment in the macroeconomy on the equilibrium price level and the equilibrium level of output.(10)
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