Question

3. The short-run and long-run supply response to a change in the price level The following graph represents the aggregate supply (AS) curve based on an expected price level of 150. The economy's potential GDP level is $9 trillion. Major unions across the country have recently negotiated three-year wage contracts with employers. The wage contracts are based on an expected price level of 150, but the actual price level turns out to be 200. Show the short-run effect of the unexpectedly high price level by dragging the curve or moving the point to the appropriate position. Note: To move the curve, select and drag any part of the curve except the point. To move the point, select and drag the point along the curve. If you want to move both, first move the curve, and then move the point. The curve and point will snap into position, so if you try to move one of them and it snaps back to its original position, just try again and drag it a little farther. 300 250 AS(1501 AS[150] 200 PRICE LEVEL 150 100 50 0 0 3 15 18 6 9 12 REAL GDP (Trillions of dollars) Interpret the change you drew on the previous graph by filling in the blanks in the following paragraph:

Answer 1

3. The short-run and long-run supply response to a change in the price level The following graph represents the aggregate supply (AS) curve based on an expected price level of 150. The economy's potential GDP level is $9 trillion. Major unions across the country have recently negotiated three-year wage contracts with employers. The wage contracts are based on an expected price level of 150, but the actual price level turns out to be 200. Show the short-run effect of the unexpectedly high price level by dragging the curve or moving the point to the appropriate position. Note: To move the curve, select and drag any part of the curve except the point. To move the point, select and drag the point along the curve. If you want to move both, first move the curve, and then move the point. The curve and point will snap into position, so if you try to move one of them and it snaps back to its original position, just try again and drag it a little farther. 300 250 AS[1501 AS[150] 200 PRICE LEVEL 150 100 50 0 0 3 15 18 6 9 12 REAL GDP (Trillions of dollars) Interpret the change you drew on the previous graph by filling in the blanks in the following paragraph:

The higher-than-expected price level causes firms to earn profit than they expected on each unit of output they produce, and, therefore, they higher lower increase their production level. At the same time, the real value of wages and other resource prices is than workers and firms expected when they signed long-term contracts. As a result, the economy as a whole produces at a level_higher its potential GDP, and unemployment is lower than its natural rate. Now, suppose prices remain higher than expected. As a result in the next round of labor negotiations, unions demand and obtain higher wages for their members. The following graph shows the potential GDP for this economy as well as the same initial aggregate supply curve as in the first graph. Show the long-run effect of the labor negotiations by dragging the either the aggregate supply (AS) curve or the potential GDP (PGDP) curve to the appropriate position. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. 300 250 AS Potential GDP O 200 AS PRICE LEVEL 150 ---+ 100 50 Potential GDP 0 0 15 18 6 9 12 REAL GDP (Trillions of dollars)

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The higher-than-expected price level causes firms to earn profit than they expected on each unit of output they produce, and, therefore, they higher lower increase their production level. At the same time, the real value of wages and other resource prices is than workers and firms expected when they signed long-term contracts. As a result, the economy as a whole produces at a level_higher its potential GDP, and unemployment is lower than its natural rate. Now, suppose prices remain higher than expected. As a result in the next round of labor negotiations, unions demand and obtain higher wages for their members. The following graph shows the potential GDP for this economy as well as the same initial aggregate supply curve as in the first graph. Show the long-run effect of the labor negotiations by dragging the either the aggregate supply (AS) curve or the potential GDP (PGDP) curve to the appropriate position. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. 300 250 AS Potential GDP O 200 AS PRICE LEVEL 150 ---+ 100 50 Potential GDP 0 0 15 18 6 9 12 REAL GDP (Trillions of dollars)