Suppose that the economy is undergoing a recession because of a fall in aggregate demand. What is happening to the unemployment rate? In a recession, is capacity utilization above or below its long-run average? Explain whether each of the following events will increase, decrease, or have no effect on long-run aggregate supply.

The United States experiences a wave of immigration.

Intel invents a new and more powerful computer chip. Asevere hurricane damages factories along the east coast. When the United States experiences a wave of immigrationthe labor force increasesso long-run aggregate supply shifts to the right.

When Intel invents a new and more powerful computer chip, productivity increasesso long-run aggregate supply increases because more output can be produced with the same inputs. When a severe hurricane damages factories along the East Coast, the capital stock is smallerso long-run aggregate supply declines.

In Figurehow does the unemployment rate at points B and C compare to the unemployment rate at point A? Under the sticky-wage explanation of the short-run aggregate-supply curve, how does the real wage at points B and C compare to the real wage at point A? Explain why the following statements are false. The statement that "the aggregate-demand curve slopes downward because it is the horizontal sum of the demand curves for individual goods" is false.

The aggregate-demand curve slopes downward because a fall in the price level raises the overall quantity of goods and services demanded through the wealth effect, the interest-rate effect, and the exchange-rate effect. The statement that "the long-run aggregate-supply curve is vertical because economic forces do not affect long-run aggregate supply" is false.

Economic forces of various kinds such as population and productivity do affect long-run aggregate supply. The long-run aggregate-supply curve is vertical because the price level does not affect long-run aggregate supply.

The statement that "if firms adjusted their prices every day, then the short-run aggregate-supply curve would be horizontal" is false. If firms adjusted prices quickly and if sticky prices were the only possible cause for the upward slope of the short-run aggregate-supply curve, then the short-run aggregate-supply curve would be vertical, not horizontal.

The short-run aggregate supply curve would be horizontal only if prices were completely fixed. The statement that "whenever the economy enters a recession, its long-run aggregate-supply curve shifts to the left" is false.

An economy could enter a recession if either the aggregate-demand curve or the short-run aggregate-supply curve shifts to the left. For each of the three theories for the upward slope of the short-run aggregate-supply curve, carefully explain the following: According to the sticky-wage theory, the economy is in a recession because the price level has declined so that real wages are too high, thus labor demand is too low.

Over time, as nominal wages are adjusted so that real wages decline, the economy returns to full employment. According to the sticky-price theory, the economy is in a recession because not all prices adjust quickly. Over time, firms are able to adjust their prices more fully, and the economy returns to the long-run aggregate-supply curve.

According to the misperceptions theory, the economy is in a fibonacci bollinger bands strategy when the price level is below what was expected.

Over time, as people observe the forex brokers in noida price level, their expectations adjust, and the ways to receive money on paypal returns to the long-run aggregate-supply curve.

The speed of the recovery in each theory depends on how quickly price expectations, wages, and prices adjust.

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Suppose the Fed expands the money supply, but because the public expects this Fed action, itsimultaneously raises its expectation of the price level. What will happen to output and the price level in the short run?

If the Fed increases the money supply and people expect a higher price levelthe aggregate-demand curve shifts to the right and the short-run aggregate-supply curve shifts to the left, as shown in Figure 9. The economy moves from point A to point B, with no change in output and a rise in the price level to P 2. If the public does not change its expectation of the price level, the short-run aggregate-supply curve does not shift, the economy ends up at point C, and output increases along with the price level to P 3.

Suppose that the economy is currently in a recession. If policymakers take no action, how will the economy evolve over time? Figure 10 depicts an economy in a recession. If policymakers take no action, the economy will return to the long-run aggregate-supply curve over time as the short-run aggregate-supply curve shifts to the right to AS 2.

The economy's new equilibrium is at point B. Suppose workers and firms suddenly the stock market declines sharply reducing consumers wealth that inflation will year. Suppose also that the economy begins in long-run equilibrium, and the aggregate-demand curve does not shift. What happens to nominal wages? What happens to real wages? Were the expectations of high inflation accurate? Explain whether each of the following events shifts the short-run 1tag trading system curve, the aggregate- demand curve, both, or neither.

For each event that does shift a curve, use a diagram to illustrate the effect on the economy. Households decide to save a larger share of their income. If households decide to save a larger share of their income, they must spend less on consumer goods, so the aggregate-demand curve shifts to the leftas shown in Figure The equilibrium changes from point A to forex trading profits B, so the price level declines and output declines.

Florida orange groves suffer a prolonged period of below-freezing temperatures. If Florida orange groves suffer a prolonged period of below-freezing temperatures, the orange harvest will be reduced. This decline in the natural rate of output is represented in Figure 13 by a shift to the left in both the short-run and long-run aggregate-supply curves.

The equilibrium changes from point A to point B, so the price level rises and output declines. If increa sed j ob opportunities cause people to leave the country, the long-run and short-run aggregate-supply curves will shift to the left because there are fewer people producing output. The aggregate-demand curve will shift to the left because there are fewer people consuming goods and services. The result is a decline in the quantity of output, as Figure 14 shows. Whether the price level rises or declines depends on the relative sizes of the shifts in the aggregate-demand curve and the aggregate-supply curves.

For each of the following events, explain the short-run and long-run effects on output and the price level, assuming policymakers take no action. When the stock market declines sharply, wealth declines, so the aggregate-demand curve shifts to the leftas shown in Figure In the short run, the economy moves from point A to point B, as output declines and the price level declines.

In the long run, the short-run aggregate-supply curve shifts to the right to restore equilibrium at point C, with unchanged output and a lower price level compared to point A. The federal government increases spending on national defense.

Eco Aggregate Demand And Supply Model Free Essays

When the federal government increases spending on national defense, the rise in government purchases shifts the aggregate-demand curve to the right, as shown in Figure In the short run, the economy moves from point A to point B, as output and the price level rise. In the long run, the short-run aggregate-supply curve shifts to the left to restore equilibrium at point C, with unchanged output and a higher price level compared to point A.

Atechnological improvement raises productivity. When a technological improvement raises productivity, the long-run and short-run aggregate-supply curves shift to the right, as shown in Figure The economy moves from point A to point B, as output rises and the price level declines.

Arecession overseas causes foreigners to buy fewer U. When a recession overseas causes foreigners to buy fewer U. Suppose that firms become very optimistic about future business conditions and invest heavily in new capital equipment.

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Label the new levels ofprices and real output. Explain in words why the aggregate quantity of output supplied changes. If firms become optimistic about future business conditions and increase investmentthe result is shown in Figure Increased optimism leads to greater investment, so the aggregate-demand curve shifts to AD 2.

The aggregate quantity of output supplied rises because the price level has risen and people have misperceptions about the price level, wages are sticky, or prices are sticky, all of which cause output supplied to increase.

Now use the diagram from part a to show the new long-run equilibrium of the economy. For now, assume there is no change in the long-run aggregate-supply curve. Explain in words why the aggregate quantity of output demanded changes between the short run and the long run. The quantity of output demanded declines as the price level rises. How might the investment boom affect the long- run aggregate-supply curve?

The investment boom might increase the long-run aggregate-supply curve because higher investment today means a larger capital stock in the future, thus higher productivity and output.