Question

PRACTICE FRQ 2: The AS/AD Model Assume the economy of Hammonton is currently in a recession in a short run equilibrium 1. Draw a correctly labeled graph of short-run aggregate supply, long-run aggregate supply and aggregate demand. 2. Show each of the following: ar Snip 1. The long-run equilibrium output, labeled Yf The current equilibrium output and price levels, labeled Ye and PLe, respectively 2. 3. Assume there is an increase in exports from Hammonton. 1. On your graph in question 1, show the effect of higher exports on the equilibrium in the short run, 2. labeling the new equilibrium output and price level Y2 and PL2, respectively. 4. As a result of the increase in exports, export-oriented industries in Hammonton increase expenditures on new container ships and equipment. 1. What component of aggregate demand will change as a result? 2. How would this spending increase affect unemployment in Hammonton? 3. What is the impact on the LRAS curve, and what does it mean?

Please help with this economics FRQ!! Thanks!

Answer 1

1) The graph is shown below

Prica LRAS SRAS1 AD1 Yf= Ye Real GDP

2) Long run output is fixed at its potential level at Yf. In the short run, the output Ye is equal to Yf because the AD and short run AS meet at an equilibrium point that lies on the long run AS

3) Higher exports means increased net exports. For open economy, higher net exports means increased AD. This means AD shifts to the right. New short run equilibrium has a higher price PL2 and a higher output YL2

Prica LRAS SRAS1 PL2 AD2 AD1 Yf=Ye YL2 Real GDP

4) 1) Since new equipment are purchased, this implies there is an increase in investment expenditure component of AD. Hence investment rises

2) This will increase employment as more labor is needed now to meet the demand. Hence unemployment falls

3) There is no impact on LRAS. It is fixed and changes only when there are changes in technology, productivity, fuel prices, amount of resources available or price expectations.