ECONOMICS W/CONNECT+20 >C<
20th Edition
ISBN: 9781259714993
Author: McConnell
Publisher: MCG CUSTOM
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Chapter 38, Problem 2P
To determine
Real output in the short run and the long run.
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ADVANCED ANALYSIS Suppose that the equation for a particular short-run AS curve is P= 40 + 0.5Q, where Pis the price level and Q
is real output in dollar terms.
Instructions: Enter your answers as a whole number.
a. What is Q if the price level is 130?
b. Suppose that the Qin your answer is the full-employment level of output. By how much will Q increase in the short run if the price
level unexpectedly rises from 130 to 142?
By how much will Q increase in the long run due to the price-level increase?
6. Why the aggregate supply curve slopes upward in the short run
In the short run, the quantity of output supplied by firms can deviate from the natural level of output if the actual price level deviates from the
expected price level in the economy. A number of theories explain reasons why 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…
Price Level
LAS
SAS,
SAS,
AD
SAS,
AD,
AD,
Real Output
Refer to the graph. Suppose the economy is at SAS, and AD₂. What is a possible way the
economy can return to potential output? What dynamic price level feedback effect could
prevent the return to potential output? How would the dynamic price level feedback effect show
up in the graph?
O A decrease in asset prices in the economy; a decrease in asset prices would
further decrease AD; a shift in AD from AD2 to AD3
O A decrease in material costs in the economy; a decrease in material costs would
decrease AD; a shift in AD from AD2 to AD1
A decrease in wages in the economy; a decrease in wages would further decrease
AD; a shift in AD from AD2 to AD3
A decrease in wages in the economy; a decrease in wages would further decrease
AD; a shift in AD from AD2 to AD1
Chapter 38 Solutions
ECONOMICS W/CONNECT+20 >C<
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- 12. Assume that an economy operates according to the sticky-wage model. The nominal wage was set to make labor supply and labor demand equal when the expected price level equaled 120 (as measured by the consumer price index). a. Use a graph of the labor market to illustrate what happens to the quantity of labor employed if the actual price level over the time period when wages are stuck equals 110. b. Use a graph of the production function to illustrate how the quantity of output produced changes if the actual price level equals 110 when the expected price level is 120. c. Given the unexpectedly low price level, will this economy be operating above, below, or at the natural rate?arrow_forwardpre to co Price Level 0 I I 2 I I 4 1 6 8 10 12 14 Real GDP (Trillions Dollars) SRAS AD 16 18 20 AD SRAS Which of the following best describes the effect of an increase in wage rates? O The price level remains the same, but the Real GDP decreases to $6 trillion. O The price level falls below PE, and the Real GDP increases to $6 trillion. The price level rises above PE, and the Real GDP decreases to $6 trillion. O The price level rises above PE, but the Real GDP remains the same.arrow_forward6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output supplied by firms can deviate from the natural level of output if the actual price level deviates from the expected price level in the economy. A number of theories explain reasons why 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 90. 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…arrow_forward
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