An increase in money supply lowers interest rate, which increases investment demand and the component of consumption demand that is funded by borrowing. This increases aggregate demand. AD curve will shift to right, increasing both price level and real GDP, resulting in a short-run inflationary gap.
In the long run, higher price level increases input costs, raising production costs. Hence firms decrease production, lowering aggregate supply. SRAS curve shifts leftward, intersecting new AD curve at further higher price level but restoring real GDP to potential GDP level, and eliminating expansionary gap.
In following graph, initial long-run equilibrium is at point A where AD0 (aggregate demand), LRAS0 (long-run aggregate supply) and SRAS0 (short-run aggregate supply) curves intersect, with initial long-run equilibrium price level P0 and initial equilibrium real GDP (= Potential GDP) Y0. When higher consumption and investment increases aggregate demand, AD curve will shift rightward from AD0 to AD1, intersecting SRAS0 at point B with higher price level P1 and higher real GDP Y1, with inflationary gap being equal to (Y1 - Y0) in short run. In long run, SRAS0 shifts left to SRAS1, intersecting AD1 at point C with further higher price level P2 and restoring real GDP to potential GDP level Y0, eliminating short-run inflationary gap.
Explain and demonstrate graphically, the short-run and long-run effects of an increase in the money supply...
7. (10 Points) Explain and demonstrate graphically the effects of a negative supply shock in both the short-run and long-run. (Hint: Use AD-AS framework) 7. (10 Points) Explain and demonstrate graphically the effects of a negative supply shock in both the short-run and long-run. (Hint: Use AD-AS framework)
Question 1: AD-SRAS-LRAS Model Using aggregate demand (AD), short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) curves, graphically illustrate the effect of an increase in the money supply on output and prices in the short and long run. Assume that the economy is initially in long run equilibrium at the potential output level and prices are fixed in the short-run. In your graph, label "A" for the initial equilibrium, "B' for the short-run equilibrium, and "C" for the long-run equilibrium.
Graphically illustrate the short-run effects of an increase in financial frictions.
Which of the following will increase both the short-run and long-run aggregate supply curves? A. There are fewer firms involved in perfectly competitive and monopolistically competitive market structures as the economy features more oligopolies than before. B. The wage rate temporarily decreases throughout the economy. C. Younger workers in the labour force receive better and more training than their predecessors. D. The supply of key raw materials, such as petroleum and bauxite, is reduced. Which of the following is true...
52. Graphically demonstrate the effect of each of the following on either the short-run aggregate supply (SAS) curve or the long-run aggregate supply (LAS) curve. Be sure to label all axes u Businesses find that they are unable to produce more iq. output without having to pay more wages or increasing their costs of capital. ir. Productivity rises by 3% and input prices rise by 5%. is. A forest fire destroys a significant portion of Canada. it. The country's currency...
(a) There are three reasons commonly given for the upward slope of the Short Run Aggregate Supply curve. Clearly explain all of them. (3 marks) (a) Using an AD/AS model, explain the effects on both prices and output in the short and long run, if there is an increase in the overall wage rate in an economy. (7 marks)
what is the difference between the short run and the long run equilibrium in the AD-AS 6. The economy is in a deep recession. In order to close the output gap, the government is planning on sending a cheque (money) to all households. Explain the short-run and the long run impact of this intervention using the ADAS model. 7. Explain in plain words how the impact of the fiscal policy described above depends on the slope of the AS curve....
1. Using equilibrium in the "money market” graphically demonstrate the effect of increasing the money supply in a liquidity trap. (5 pts)
1. Demonstrate graphically and explain verbally the concept of consumer surplus. 2. Demonstrate graphically and explain verbally the concept of producer surplus. 3. Demonstrate graphically and explain verbally why the equilibrium values of price and quantity in a supply and demand model lead to the maximum combination of consumer and producer surplus. 6. Demonstrate graphically and explain verbally the cost to consumers of a tax of t per carton imposed on the sellers of cigarettes. Where does the lost producer...
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?