Question

Need detailed explanations for short-run and long-run equilibrium.

3. For each of the following scenarios, describe the effect on the AD curve, the SRAS curve, and the LRAS curve. Identify whether the effect causes a shift of the curve or a movement along the curve and identify the direction of the shift or the movement. Answer these questions on your assignment paper. a. An increase in the money supply causes interest rates to fall. b. The price of commodities (production inputs) increases by 10% this year. C. The price of oil falls. d. Labour unions successfully negotiate an increase in nominal wages for their workers. e. The supply of unsold houses in an economy increases by 20%. f. There is an increase in labour productivity due to increases in human capital. g. The government increases spending in order to finance the war against terrorists.

Answer 1

(a)

Lower interest rate increases investment, increasing aggregate demand in short run. The AD curve will shift rightward. Price level and real GDP will increase.

In long run, higher price level will decrease firm production, lowering aggregate supply. SRAS will shift leftward in long run.

(b)

In short run, higher input cost will decrease firm production, lowering aggregate supply. SRAS will shift leftward in short run. Price level will increase and real GDP will decrease.

In long run, prices and wages adjust, so aggregate demand increases. The AD curve will shift rightward.

(c)

In short run, lower oil price will increase firm production, raising aggregate supply. SRAS will shift rightward in short run. Price level will decrease and real GDP will increase.

In long run, prices and wages adjust, so aggregate demand decreases. The AD curve will shift leftward.

(d)

In short run, higher wage rate will decrease firm production, lowering aggregate supply. SRAS will shift leftward in short run. Price level will increase and real GDP will decrease.

In long run, prices and wages adjust, so aggregate demand increases. The AD curve will shift rightward.

NOTE: As HOMEWORKLIB's Answering Policy, 1st 4 parts have been answered.