The short-run and long-run effects on the economy when the policymakers assume that the economy is overheating
Introduction:
Natural Rate of
Aggregate Demand: The amount of goods and services purchased at all possible prices at a given point of time is termed as Aggregate Demand
Recessionary Gap: When the economy operates below its potential output is termed as the Recessionary Gap.
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Econ Macro (book Only)
- The figure below is a part of the AD-AS model as a description of the current situation of an economy. PA=$10 P YA=4000 Y a) Find the short-run equilibrium (i.e. the real output and the price level thereof) of this economy. b) If the natural level of output is 3500, which one will be higher, the unemployment rate at point A, or the natural unemployment rate? Explain. c) Give two reasons as to why the short-run aggregate supply is upward sloping. d) Suppose the government takes no action about the situation indicated above. Explain, with the help of a figure properly labeled, what will happen in this economy in the long run. e) Describe the two kinds of macroeconomic policies that can be used in the situation described before part c). Indicate clearly in your description whether each policy is to the aggregate demand or aggregate supply or Further, give reason(s) as to why the government may want to use these policies rather than doing nothing.arrow_forwardIs there a connection between the concepts of Long Run Aggregate Supply and the Natural Rate of Unemployment? Describe precisely how you think an economy would move towards long run equilibrium over time.arrow_forwardExplain whether each of the following events shifts the short-run aggregate supply curve, the aggregate demand curve, both, or neither. Draw a diagram to show what happens to output and the price level in Pakistan, assuming policymakers take no action. The Karachi stock market declines sharply, reducing consumers’ wealth. A severe Flood damages factories along the Indus River. Pakistan experiences a wave of immigration A boom overseas causes foreigners to buy more Pakistan goods. State Bank of Pakistan increases the policy rate (Interest rate).arrow_forward
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