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13. Suppose the economy is in a long-run equilibrium. a. Use the AD-AS model to graphically depict the current state of the economy. b. Use the graph in part (a) to describe the change the economy will go through if technological progress leads to higher productivity. What happens to the equilibrium aggregate price and equilibrium output? c. After the change in part (b), is the economy still in a long-run equilibrium? Why or why not?

13. Suppose the economy is in a long-run equilibrium. a. Use the AD-AS model to graphically depict the current state of the economy. b. Use the graph in part (a) to describe the change the economy will go through if technological progress leads to higher productivity. What happens to the equilibrium aggregate price and equilibrium output? c. After the change in part (b), is the economy still in a long-run equilibrium? Why or why not?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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**Question 13: Long-Run Equilibrium Analysis** **Context:** Suppose the economy is in a long-run equilibrium. **Tasks:** **a. Use the AD-AS model to graphically depict the current state of the economy.** - **Instruction:** Create a graph with the Aggregate Demand (AD) curve and the Aggregate Supply (AS) curve intersecting at the equilibrium point, showcasing long-run equilibrium. **b. Use the graph in part (a) to describe the change the economy will go through if technological progress leads to higher productivity. What happens to the equilibrium aggregate price and equilibrium output?** - **Instruction:** Illustrate and explain how technological progress shifts the Aggregate Supply (AS) curve to the right. Discuss the resulting changes to the equilibrium aggregate price and output level. **c. After the change in part (b), is the economy still in a long-run equilibrium? Why or why not?** - **Instruction:** Analyze whether the new equilibrium, after the technological progress, still satisfies the conditions for long-run equilibrium. **d. Do we observe any output gap after the change? How do you know?** - **Instruction:** Assess if there’s an output gap (difference between actual and potential output) after the technological advancement. Explain your reasoning. **e. What will happen to the economy in the long run? Make sure to use the concept of sticky wages to support your answer.** - **Instruction:** Discuss the long-run adjustments in the economy, focusing on the concept of sticky wages and how they might affect the return to a new long-run equilibrium. **f. Graphically depict the change in part (e). Compared to the initial long-run equilibrium, what happens to the equilibrium aggregate price and equilibrium output?** - **Instruction:** Create a graph showing the process outlined in part (e) and compare it to the initial state of long-run equilibrium. Describe the changes in the equilibrium aggregate price and output. **Explanatory Note:** Ensure that each graph is accurately labeled, with clear axes, curves, and equilibrium points. Provide detailed explanations for each change described in the tasks above to enhance understanding.
Transcribed Image Text:**Question 13: Long-Run Equilibrium Analysis** **Context:** Suppose the economy is in a long-run equilibrium. **Tasks:** **a. Use the AD-AS model to graphically depict the current state of the economy.** - **Instruction:** Create a graph with the Aggregate Demand (AD) curve and the Aggregate Supply (AS) curve intersecting at the equilibrium point, showcasing long-run equilibrium. **b. Use the graph in part (a) to describe the change the economy will go through if technological progress leads to higher productivity. What happens to the equilibrium aggregate price and equilibrium output?** - **Instruction:** Illustrate and explain how technological progress shifts the Aggregate Supply (AS) curve to the right. Discuss the resulting changes to the equilibrium aggregate price and output level. **c. After the change in part (b), is the economy still in a long-run equilibrium? Why or why not?** - **Instruction:** Analyze whether the new equilibrium, after the technological progress, still satisfies the conditions for long-run equilibrium. **d. Do we observe any output gap after the change? How do you know?** - **Instruction:** Assess if there’s an output gap (difference between actual and potential output) after the technological advancement. Explain your reasoning. **e. What will happen to the economy in the long run? Make sure to use the concept of sticky wages to support your answer.** - **Instruction:** Discuss the long-run adjustments in the economy, focusing on the concept of sticky wages and how they might affect the return to a new long-run equilibrium. **f. Graphically depict the change in part (e). Compared to the initial long-run equilibrium, what happens to the equilibrium aggregate price and equilibrium output?** - **Instruction:** Create a graph showing the process outlined in part (e) and compare it to the initial state of long-run equilibrium. Describe the changes in the equilibrium aggregate price and output. **Explanatory Note:** Ensure that each graph is accurately labeled, with clear axes, curves, and equilibrium points. Provide detailed explanations for each change described in the tasks above to enhance understanding.
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