Suppose the economy is initially at point 1 on the following graph and that the Fed increases the money supply. Suppose also that individuals hold rational expectations, prices and wages are flexible, and individuals overestimate the increase in aggregate demand (blas upward). On the following graph, use the black point (cross symbol) to show the short-run equilibrium. Then use the grey point (star symbol) to show the long- run equilibrium. PRICE LEVEL 112 106 100 In the short run, the price level GDP is LRAS Natural Real GDR GRAS GRAS AD AD , and Real GDP is Short Run Equlonum ☀ Long Run Equbrum Natural Real GDR. In the long run, the price level is and Real
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- The following graph plots aggregate demand (AD2027AD2027) and aggregate supply (AS) for the imaginary country of Cotopaxi in the year 2027. Suppose the natural level of output in this economy is $6 trillion. On the following graph, use the green line (triangle symbol) to plot the long-run aggregate supply (LRAS) curve for this economy. Economists forecast that if the government takes no action and the economy continues to grow at the current rate, aggregate demand in 2028 will be given by the curve labeled ADAADA, resulting in the outcome given by point A. If, however, the government pursues an expansionary policy, aggregate demand in 2028 will be given by the curve labeled ADBADB, resulting in the outcome given by point B. The following table presents projections for the unemployment rates that would occur at point A and point B. Consider the potential rate of inflation between 2027 and 2028, depending on whether the economy moves from the initial price level of 102 to the…Assume the economy of Germany is in a long run equilibrium with full employment. Draw a correctly labeled graph of short run aggregate supply, long run aggregate supply, and aggregate demand. Show each of the following Equilibrium output, labeled Y1. Equilibrium price level, labeled PL1 2. Suppose that there is a significant boom in the German stock market, causing all stocks to increase in value by 15%. On your graph in part A, show the effect this will have on the equilibrium in the short run, labeling the new equilibrium output and price level Y2 and PL2, respectively. 3. Using a correctly labeled graph of the Phillips Curve, show how this change will affect the economy. 4. What two fiscal policy options does the federal government have to fix the market imbalance? Explain how each would affect the economy.Assume that the housing market is in equilibrium in year 1. In year 2, the mortgage rate that banks charge consumers decreases, but producers are not affected. Also in year 2, the cost of lumber used to build homes decreases. Which of the following is most likely to be the equilibrium change? a The equilibrium will be at point C before the change in expectations and point B after the change b The equilibrium will be at point A before the change in expectations and point B after the change c The equilibrium will be at point A before the change in expectations and point E after the change d The equilibrium will be at point E before the change in expectations and point A after the change
- 6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output supplied by firms can deviate from the natural level of output if the actual price level deviates from the expected price level in the economy. A number of theories explain reasons why this might happen. For example, the misperceptions theory asserts that changes in the price level can temporarily mislead firms about what is happening to their output prices. Consider a soybean farmer who expects a price level of 100 in the coming year. If the actual price level turns out to be 90, soybean prices will and if the farmer mistakenly assumes that the price of soybeans declined relative to other prices of goods and services, the quantity of soybeans supplied. If other producers in this economy mistake changes in the price level for changes in their relative prices, the unexpected decrease in the price level causes the quantity of output supplied to level of output in the short run. she…The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that a = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $60 billion of real GDP and that people expect a price level of 95. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 85, 90, 95, 100, and 105. PRICE LEVEL 125 120 115 110 105 100 95 90 85 80 75 0 10 20 40 50 60 70 30 OUTPUT (Billions of dollars) 80 90 100 O AS LRAS ? The short-run quantity of output supplied by firms will fall short of the natural level of output when the actual price level level that…Assume that the housing market is in equilibrium in year 1. In year 2, the mortgage rate that banks charge consumers decreases, but producers are not affected. Which of the following is most likely to be the equilibrium change? Price D. Quantity Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. The equilibrium will be at point C before the change in expectations and point A after the a change The equilibrium will be at point A before the change in expectations and point B after the b change The equilibrium will be at point A before the change in expectations and point C after the change The equilibrium will be at point E before the change in expectations and point C after the d change [3 Fulls 40 la
- Suppose that the inflation rate remains constant while output increases and the unemployment rate decreases. Using an aggregate demand and supply graph, show how this scenario is possible.6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output that firms supply can deviate from the natural level output if the actual price level in the economy deviates from the expected price level. Several theories explain how this might happen. For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 90. Faced with high menu costs, and firms that rely on catalogs the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will will respond by the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected decrease…Consider the graph below. Assume that, initially, an economy has long-run aggregate supply corresponding to LRAS, short-run supply corresponding to SRAS₁, and aggregate demand corresponding to AD₁. Where will the new equilibrium be in the short run if income tax hikes cause workers to lower their expectations of future income? (Do not assume that all curves shown actually come into play.) Price level (P) 100 95 90 Click or tap the appropriate place in the image. LRAS SRAS SRAS AD₁ AD₁ Real GDP (Y)
- As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices. Starting from a long-run equilibrium, illustrate the effects of these two changes on aggregate supply and aggregate demand on the following graph. Then, on the subsequent graph, indicate what happens on a Phillips-curve diagram. Price Level Inflation Rate LRAS Aggregate Supply LRPC Aggregate Demand Quantity of Output Unemployment Rate SRPC Aggregate Demand Aggregate Supply LRAS Long-run Equilibrium SRPC LRPC + Long-Run EquilibriumAssume that the housing market is in equilibrium in year 1. In year 2, the mortgage rate that banks charge consumers increases, but producers are not affected. Which of the following is most likely to be the equilibrium change? a The equilibrium will be at point C before the change in expectations and point A after the change b The equilibrium will be at point A before the change in expectations and point B after the change c The equilibrium will be at point A before the change in expectations and point C after the change d The equilibrium will be at point E before the change in expectations and point C after the changeAccording to the "4-Quadrant Model" (4QM), which of the following statement is correct? O If there is a positive demand shock in the space market, the housing rent is going to increase in the short run, and will be lower than the current rent in the long run. If there is a positive demand shock in the space market, the housing price is going to decrease in the short run, and increase in the long run. If there is a positive demand shock in the asset market, the housing rent is going to decrease in the long run. O If there is a positive demand shock in the asset market, the housing price is going to decrease in the short run, and will be lower than the current price in the long run.