We examined the (classical) aggregate supply/aggregate demand model. Explain in your own words how the economy would adjust to LR equilibrium automatically from being in a recession.
In Classical theory, the economy is self-regulating. Classical economists say the economy is always at or near the natural level of real GDP. They believe in say's law: supply creates its own demand. And they believe price-wage and interest rates are flexible.
In the time of recession, aggregate demand falls so AD1 curve shifts to the left to AD2. So price level falls from P1 to P2. And the economy's real GDP falls below the natural level from Y1 to Y2, that is now the economy's resource is not fully employed. When there are unemployed resources classical theory predicts that paying the wage to these resources will fall. that is suppliers now able to supply more goods at lower cost, it shifts SRAS1 curve to the right SRAS2. In the end, equilibrium price falls further to P3 and the economy returns to the natural level of real GDP
We examined the (classical) aggregate supply/aggregate demand model. Explain in your own words how the economy would...
We examined the Keynesian model in class. Using the AS/AD model, explain how the economy would recover from a recession.
3.18 A massive decrease in aggregate demand plunges the U.S. economy into a recession and unemployment rates soar to 10%. According to the classical model of macroeconomic equilibrium the economy will stagnate in a recession unless measures are taken to increase aggregate demand nominal wages will decline increasing aggregate supply until full employment is restored nominal wages will remain fixed the aggregate supply curves will shift inward making the recession worse the price level will not decline Key Concepts: Classical...
Using the Aggregate Demand/ Aggregate Supply Model, explain how lowering the reserve ratio affects the economy.
Draw and carefully describe a graph that utilizes the Aggregate Demand/Aggregate Supply model that would illustrate the current state of the aggregate economy in the United States. The Aggregate Demand/Aggregate Supply Model is first explained in Chapter 11of your text. Carefully explain your graph.You should draw your own AD/AS graph which you can then scan and paste into your post. Your graph needs to be clearly labeled and explained carefully. Make sure that your graph includes an aggregate demand (AD)...
The figure below depicts the aggregate demand curve (AD) and the long-run aggregate supply curve (LRAS) for the United States. The economy is initially at long-run equilibrium, at point A.One of the most contentious issues among economists involves the economy’s adjustment to long-run equilibrium. Some economists believe that adjustment can and should occur naturally. This group, the classical economists, stresses the importance of aggregate supply. Others see the return to long-run equilibrium as an adjustment that occurs unpredictably and often...
The figure below depicts the aggregate demand curve (AD), the short-run aggregate supply curve (SRAS), and the long-run aggregate supply curve (LRAS) for the United States. The economy is initially at long-run equilibrium, at point A.One of the most contentious issues among economists involves the economy’s adjustment to long-run equilibrium. Some economists believe that adjustment can and should occur naturally. This group, the classical economists, stress the importance of aggregate supply. Others see the return to long-run equilibrium as an...
EXPLAIN HOW THE AGGREGATE DEMAND AND AGGREGATE SUPPLY MODEL DIFFER FROM THE AGGREGATE EXPENDITURES MODEL
Create your own monetary policy rule that would insulate the aggregate economy completely from aggregate demand shocks - so that neither inflation nor output would change if an aggregate demand shock hit the economy. Explain why your policy works. (Assume that policymakers can observe the aggregate demand shocks directly)
Using the aggregate demand (AD), the short-run aggregate supply (SRAS), and the long-run aggregate supply (LRAS) curves, briefly explain how an open market purchase will affect the equilibrium price level (P) and real output (Y) in the short run. Assume the economy is initially in a recession?
Use the Aggregate Demand and Aggregate Supply model to explain the current crisis in both graphs and words. Explain only the current economic contraction without talking about the government and Federal Reserve responses. Start with thinking about how AD and/or AS would be affected by the social distancing measures which mean that people would stay home, unemployment rises, and non-essential businesses close. (200-250 words)