ZuoTi.Pro
Question
plz thanks
7. Suppose the economy is currently in short run macroeconomic equilibrium, with actual GDP bigger than potential GDP. (a) De
business   economics   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Price Level AS AS P P P AD AD Y Y OutputAns.

a) A positive output gap is called inflationary gap. This occurs due to a positive demand shock which increases the aggregate demand for goods and services shifting the aggregate demand curve rightwards from AD to AD'. This creates a shortage of goods and services in the market leading to increase in price level from P to P' and increase in level of output from potential level Y to Y'.

b) In long run, an increase in price level leads to decrease in real wages of the workers, so, they demand more wages increasing cost of production which makes the production units to decrease the production leading to decrease in aggregate supply of goods and services shifting the aggregate supply curve leftwards from AS to AS'. This increases the price level further to P" and decreases output back to potential level Y.

* Please don’t forget to hit the thumbs up button, if you find the answer helpful.

Thank You

0 0
Add a comment
Know the answer?
Add Answer to:
plz thanks 7. Suppose the economy is currently in short run macroeconomic equilibrium, with actual GDP...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • plz emergency thanks 13. Suppose the economy is currently in long run macroeconomic equilibrium, with actual...

    plz emergency thanks 13. Suppose the economy is currently in long run macroeconomic equilibrium, with actual GDP equal to potential GDP. (a) Depict this situation using AD-AS, being sure to label all curves and axes. 5 points. The government invests significant resources in building new schools and universities. (b) Depict the effect on prices and output this will have on AD-AS model and the new short run equilibrium (You can use the same graph as in (a) as long as...

  • If the economy is operating at e no + Is the economy in short-run macroeconomic equilibrium?...

    If the economy is operating at e no + Is the economy in short-run macroeconomic equilibrium? Explain Is the economy in long-run macroeconomic equilibrium? Explain What type of gap exists in this economy? What will happen to the size of the output gap in the long run? LRAS SRASI AD Above full employed equilibrium

  • Suppose the economy is currently in short run macroeconomic equilibrium at a real GDP level of...

    Suppose the economy is currently in short run macroeconomic equilibrium at a real GDP level of $14 trillion. The full employment level of output is $12 trillion. What could the government do to avoid a demand pull inflation situation? Your answer must be specific in giving all of the actions that could taken by the government and what impact these actions would have on the aggregate demand/supply model to avoid the demand-pull inflation situation. D oo - FormatVBI U -

  • Refer to the figure below. Suppose the economy is in a short-run equilibrium at output Y3...

    Refer to the figure below. Suppose the economy is in a short-run equilibrium at output Y3 and inflation rate π2. The economy is currently experiencing ______, and the correct monetary policy response to this situation, to return the economy to potential GDP, is to ______. Select one: a. a recessionary gap; raise taxes b. an expansionary gap; cut taxes c. a recessionary gap; increase the money supply d. an expansionary gap; decrease the money supply Inflation rate ASI AS2 AD...

  • The economy of Ashenvale is currently in a short-run equilibrium, depicted by point "Eo" on the...

    The economy of Ashenvale is currently in a short-run equilibrium, depicted by point "Eo" on the graph The economy is currently experiencing a recessionary gap The size of this gap is $ If there is no intervention, the level of actual unemployment will Economy of Ashenvale 2,400 Y* 2,000 1,600 Vthe 1,300 natural level of unemployment As factor prices change, the unit cost of production will Firms will respond to these chagig ui costs by either of output or charging...

  • QUESTION 31 Figure 13-5 shows the short-run macroeconomic equilibrium of an economy at Point A. In...

    QUESTION 31 Figure 13-5 shows the short-run macroeconomic equilibrium of an economy at Point A. In the figure, Point A suggests that: Figure 13-5 LRAS SRAS AD Real GDP a. the government should increase the level of taxes in the cconomy. b. the economy is operating with a recessionary gap c. the govemment should decrcase its budget d. the economy is operating at long-run equilibrium. e. the real value of currency in the economy is lower than its nominal valuc....

  • Assume that the economy is currently in short run equilibrium but experiencing a recessionary gap. -Graphically...

    Assume that the economy is currently in short run equilibrium but experiencing a recessionary gap. -Graphically illustrate the problem -Identify the combination of monetary policies that the Federal Reserve would pursue to correct problem -Graphically illustrate and explain how these monetary policies affect the market for reserves, the market for M1, and the market for real goods and services (AD-AS) -Make sure that you identify the Fed’s goals/objectives and also graphically illustrate the solution.

  • Suppose the economy starts out in a long-run equilibrium at potential GDP.. Draw the economy’s short-run...

    Suppose the economy starts out in a long-run equilibrium at potential GDP.. Draw the economy’s short-run and long-run Phillips curves in one graph an AS/AD diagram with potential GDP shown in a second graph. Suppose a wave of business pessimism reduces aggregate demand. Show the effect of this shock on your diagrams from part a). Can the government return the economy to its original inflation rate and original unemployment rate using fiscal policy? Now start over with the economy back...

  • QUESTION 7 (25 points): Economic Fluctuation using AD-AS framework Suppose that the short-run aggregate supply curve...

    QUESTION 7 (25 points): Economic Fluctuation using AD-AS framework Suppose that the short-run aggregate supply curve has a positive slope and that the economy starts at a long-run equilibrium. Now imagine that 10 million people move to Australia they found that Australians live an average of 10 extra years due to the relax lifestyle that they enjoy. This is a permanent change in Labor in the U.S. economy. (a) (10 points) No Policy Intervention: Using the model of Aggregate Demand...

  • Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of...

    Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP? A) Output will decrease. B) Prices will increase. C) Unemployment will rise. D) Short-run aggregate supply will shift to the right.

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT