Principles of Economics (Second Edition)
2nd Edition
ISBN: 9780393614077
Author: coppock, Lee; Mateer, Dirk
Publisher: W. W. Norton & Company
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Question
Chapter 27, Problem 4QFR
To determine
To explain:
The factors that cause shift in the long-term
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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…
Chapter 20 Homework 1
Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 105.
On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange
line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 95, 100, 105, 110,
and 115.
PRICE LEVEL
125
120
115
110
105
100
95
90
85
80
75
0
10
20
30 40 50 60 70
OUTPUT (Billions of dollars)
80
90
100
AS
LRAS
The short-run quantity of output supplied by firms will fall short of the natural level of output when the actual price level
level that people expected.
the price
What are three factors that help explain the slope of the aggregate demand curve? What is the most important factor? Why?
Chapter 27 Solutions
Principles of Economics (Second Edition)
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- 6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy deviates from the expected price level. Several theories explain how this might happen. For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 110. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will , and firms that rely on catalogs will respond by the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected…arrow_forwardUse the following graph to answer the following questions. Line Y Price level (P) 100 80 B Line Z Line X2 Line X1 Real GDP (3) If point A occurs chronologically before point B, then this graph could represent a decrease in aggregate demand with a decrease in long-run and short-run aggregate supply. a decrease in aggregate demand with constant long-run and short-run aggregate supply. constant aggregate demand with a decline in long-run aggregate supply. an increase in aggregate demand with constant long-run and short-run aggregate supply. constant aggregate demand with a decline in short-run aggregate supply.arrow_forwardIn the following table, determine how each event affects the position of the aggregate demand curve.arrow_forward
- On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 100, 105, 110, 115, and 120. PRICE LEVEL 125 120 115 + 110 105 100 95 90 85 80 75 0 10 20 30 40 50 60 70 OUTPUT (Billions of dollars) 80 90 100 0 AS LRAS ? The short-run quantity of output supplied by firms will fall short of the natural level of output when the actual price level level that people expected. the pricearrow_forwardAssume the graph represents the Japanese economy during the first quarter of 2014. Use the information from the seventh paragraph of the Washington Post article Japan Recession, Europe Stagnation Cast Pall over Global Economic Outlook to demonstrate how the policies of Prime Minister Shinzo Abe affected the economy in the subsequent quarters of 2014. The graph depicts aggregate demand (AD), short‑run aggregate supply (SRAS), and long‑run aggregate supply (LRAS). LRAS is sometimes labeled potential output.arrow_forwardWhat kind of change would happen to aggregate demand, aggregate supply, and real GDP. if foreign countries purchase an unusually large number of U. S. manufactured passenger and military airplanes.arrow_forward
- What change does recession has on the price and output level when the change in aggregate demand is more than change in aggregate supply ?arrow_forwardThe following graph shows the short-run and long-run aggregate supply curves (SRAS and LRAS) for an economy. Suppose there is a technological improvement that allows firms to reduce their costs of production permanently. Drag one or both of the curves on the graph to illustrate the long-term effects of this change. If you don't believe there will be any long-term effects, leave the curves where they are. 240 LRAS SRAS 200 SRAS 160 LRAS 120 80 40 6 12 18 24 REAL GDP (Trillions of dollars) Assuming aggregate demand is not affected by the technological improvement, the long-run effect of this v supply shock is v in aggregate output and v in the price level. PRICE LEVELarrow_forwardWhat are the major factors causing a shift in aggregate demand (inward or outward)? What are the major factors that will affect short-run aggregate supply? Long-run aggregate supply?arrow_forward
- How did the decline in U.S. home prices in 2006–2008 affect aggregate demand?arrow_forwardThe graphs illustrate an initial equilibrium for the economy. Suppose that the Federal Reserve raises interest rates. Use the graphs to show the new positions of aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) in both the short run and the long run, as well as the short-run and long-run equilibriums resulting from this change. Then, indicate what happens to the price level and GDP in the short run and in the long run. Aggregate price level Short-run graph GDP In the short run, the price level LRAS Real GDP SRAS Short-run equilibrium AD and Aggregate price level Long-run graph LRAS Real GDP In the long run, the price level GDP SRAS Long-run equilibrium AD andarrow_forwardDraw a correctly labeled graph of short-run aggregate supply, long-run aggregate supply, and aggregate demand. Show each of the following in your graph. Assume the economy of Econland is in long-run equilibrium with full employment.arrow_forward
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