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Suppose the potential level of real GDP for a hypothetical economy is $250 and the price level (P) initially is 100.Use the following short-run aggregate supply schedules below to answer the questions. Suppose the potential level of real GDP for a hypothetical economy is $250 and the price level (P) initially is 100.Use the following short-run aggregate supply schedules below to answer the questions. (a) What will be the short-run level of real GDP if the price level rises unexpectedly from 100 to 110 because of an increase in aggregate demand? Falls unexpectedly from 100 to 90 because of a decrease in aggregate demand? Explain each situation.(b) What will be the long-run level of real GDP when the price level rises from 100 to 110? Falls from 100 to 90? Explain each situation. (a) What will be the short-run level of real GDP if the price level rises unexpectedly from 100 to 110 because of an increase in aggregate demand? Falls unexpectedly from 100 to 90 because of a decrease in aggregate demand? Explain each situation.(b) What will be the long-run level of real GDP when the price level rises from 100 to 110? Falls from 100 to 90? Explain each situation.

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(a) In the short run, real GDP will rise...

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In general, the Canadian economy has experienced ongoing inflation.Explain how this is possible.

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As the Canadian economy has grown, the l...

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What are three significant generalizations regarding the inflation-unemployment relationship that are supported by results from the long-run AD-AS model?

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First, under normal circumstances, there...

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Describe the characteristics of the short-run aggregate supply curve.Explain what happens to: (1) nominal wages; (2) real wages profits as the price level increases from the full-employment level of output.Then explain what happens to these variables as the price level decreases from the full-employment-level of output.

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The short-run aggregate supply curve will be an upward sloping curve with the price level on the vertical axis and real domestic output on the horizontal axis.The initial level of output will be the full-employment level of output. As the price level increases from the full-employment level of output, nominal wages will remain unchanged.However, real wages are lower at the higher price level.Revenues to the firm increase because nominal wages are fixed while product prices rise.Furthermore, the profits for firms will rise.Firms will have an incentive to increase output and employment (hiring temporary or part-time workers or paying for overtime), so real GDP will increase and unemployment will fall below its natural rate. As the price level decreases from the full-employment level of output, nominal wages remain unchanged.However, real wages are higher at the lower price level.Revenues to the firm decrease because nominal wages are fixed while product prices fall.Also, the profits for firms will decrease.Firms will have an incentive to decrease output and employment, so real GDP will decrease and unemployment will rise above its natural rate.

What is the long-run equilibrium in the aggregate demand-aggregate supply model?

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The equilibrium real GDP and price level...

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Describe the characteristics of the long-run aggregate supply curve.Explain how changes in the price level affect the short-run aggregate supply curve and the long-run aggregate supply curve.

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The long-run aggregate supply curve will...

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(a) Using a graph showing aggregate demand, short-run aggregate supply, and long-run aggregate supply, illustrate an economy that faces an inflationary gap. (a) Using a graph showing aggregate demand, short-run aggregate supply, and long-run aggregate supply, illustrate an economy that faces an inflationary gap. (b) Explain how the inflationary gap can be eliminated and evaluate the possibilities. (b) Explain how the inflationary gap can be eliminated and evaluate the possibilities.

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(b) The inflationary gap can be eliminat...

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If the Phillips Curve exists in reality, what dilemma does this create for fiscal and monetary policies? Explain.

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The dilemma is that an expansionary fisc...

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Describe the process that occurs with demand-pull inflation in the long-run aggregate demand-aggregate supply model.Assume that the economy is initially at the full-employment level of real GDP.

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An increase in aggregate demand will cau...

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Why is the difference between the actual and expected rates of inflation important for explaining rising inflation?

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When the actual rate of inflation is hig...

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Answer the questions based on the following diagram. Answer the questions based on the following diagram. (a) Assume the economy is initially at point B1 and there is an increase in aggregate demand, which results in a 4% increase in prices.Describe the short-run and long-run outcomes that would result in this economy.(b) Assume the economy is initially at point B2, and there is an increase in aggregate demand.What will happen in the economy? Explain, using the graph.(c) Based on this diagram, what would the prediction be for the natural (full-employment) rate of unemployment? (a) Assume the economy is initially at point B1 and there is an increase in aggregate demand, which results in a 4% increase in prices.Describe the short-run and long-run outcomes that would result in this economy.(b) Assume the economy is initially at point B2, and there is an increase in aggregate demand.What will happen in the economy? Explain, using the graph.(c) Based on this diagram, what would the prediction be for the natural (full-employment) rate of unemployment?

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(a) In the short run, the unemployment r...

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Using the Sherwood Forest example from the text, explain the Laffer curve.

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The popularization of the idea that tax-...

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What is the Phillips Curve? What concept does it illustrate?

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The Phillips Curve shows the relationshi...

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What is the basic difference between the short run and long run as these terms relate to macroeconomics? Why does this difference occur?

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The short run is a period in which nomin...

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Suppose the potential level of real GDP for a hypothetical economy is $160 and the price level (P) initially is 200.Use the following short-run aggregate supply schedules to answer the questions. Suppose the potential level of real GDP for a hypothetical economy is $160 and the price level (P) initially is 200.Use the following short-run aggregate supply schedules to answer the questions. (a) What will be the short-run level of real GDP if the price level rises unexpectedly from 200 to 210 because of an increase in aggregate demand? Falls unexpectedly from 200 to 190 because of a decrease in aggregate demand? Explain each situation.(b) What will be the long-run level of real GDP when the price level rises from 200 to 210? Falls from 200 to 190? Explain each situation. (a) What will be the short-run level of real GDP if the price level rises unexpectedly from 200 to 210 because of an increase in aggregate demand? Falls unexpectedly from 200 to 190 because of a decrease in aggregate demand? Explain each situation.(b) What will be the long-run level of real GDP when the price level rises from 200 to 210? Falls from 200 to 190? Explain each situation.

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(a) In the short run, real GDP will rise...

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Describe cost-push inflation in the long-run aggregate demand-aggregate supply model.Explain the policy dilemma for government policy if no action is taken and if monetary and fiscal policies are used to counter the cost-push inflation.Assume that the economy is initially at the full-employment level of real GDP.

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Cost-push inflation is caused by an incr...

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Explain the Phillips Curve concept and construct an example of the curve on the below graph. Explain the Phillips Curve concept and construct an example of the curve on the below graph.

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The Phillips Curve concept shows a stabl...

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Compare and contrast the short-run Phillips Curve and the long-run Phillips Curve.

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In the short-run, an expansion of aggreg...

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If the long-run supply curve is fixed in place, can there be persistent inflation?

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No there cannot be persistent inflation.Demand and supply shocks can cause, respectively, demand-pull inflation and cost-push inflation.But in both these cases, the extent of the inflation is finite because the size of the initial movement in either the AD curve or the AS curve is limited.Hence, there cannot be persistent inflation.

(a) Using a graph showing aggregate demand, short-run aggregate supply, and long-run aggregate supply, illustrate an economy that faces a recessionary gap. (a) Using a graph showing aggregate demand, short-run aggregate supply, and long-run aggregate supply, illustrate an economy that faces a recessionary gap. (b) Explain how the recessionary gap can be eliminated and evaluate the possibilities. (b) Explain how the recessionary gap can be eliminated and evaluate the possibilities.

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(b) The recessionary gap can be eliminated if aggregate demand shifts to the right.This can occur through government policy such as higher government expenditures or lower taxes or through recovery in some component of aggregate demand such as investment or net exports.If the gap is eliminated this way, real GDP returns to its full-employment level but the price level rises.The recessionary gap can also be eliminated if the short-run aggregate supply shifts to the right.This would occur as nominal wages and resource prices fall in response to the above natural rates of unemployment.As aggregate supply increases, real GDP returns to its full-employment level and the price level falls.However, this adjustment process can take a long time and the economy may be unwilling to bear the costs of high unemployment.It may be necessary for the government to stimulate aggregate demand to eliminate the gap.

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