4. The response of the self-regulating economy The economy of Bandora is currently in a state of long-run equilibrium in which the economy is producing at its Natural Real GDP. The level of Real GDP is currently 8 trillion dollars, and the price level is 120. PRICE LEVEL 140 135 130 125 120 115 Changes in a Self-Regulating Economy AD₂ AD₁ 110 65 105 SRAS 100 no LRAS 0 2 4 B 8 10 12 14 18 REAL GDP (Trillions of dollars) Suppose there is a sudden decrease in government purchases that causes a shift in aggregate demand from AD₁ to AD2. As a classical economist a recessionary gap or from Bandora, you explain that the shift in aggregate demand creates an inflationary gap You also explain that Real GDP, the price level, or both the . price level and real GDP will be affected in the short run. greater than You note that such a gap leads to an unemployment rate that is or less than to short-run aggregate supply,, aggregate . As wages change, the demand, or long-run aggregate supply explain that in the long run, rise or fall both the price level and Real GDP, only Real GDP. or only the price level right the natural unemployment rate. This means that wages are certain left or curve shifts to the until Real GDP equals Natural Real GDP. Finally, you will be affected.
4. The response of the self-regulating economy The economy of Bandora is currently in a state of long-run equilibrium in which the economy is producing at its Natural Real GDP. The level of Real GDP is currently 8 trillion dollars, and the price level is 120. PRICE LEVEL 140 135 130 125 120 115 Changes in a Self-Regulating Economy AD₂ AD₁ 110 65 105 SRAS 100 no LRAS 0 2 4 B 8 10 12 14 18 REAL GDP (Trillions of dollars) Suppose there is a sudden decrease in government purchases that causes a shift in aggregate demand from AD₁ to AD2. As a classical economist a recessionary gap or from Bandora, you explain that the shift in aggregate demand creates an inflationary gap You also explain that Real GDP, the price level, or both the . price level and real GDP will be affected in the short run. greater than You note that such a gap leads to an unemployment rate that is or less than to short-run aggregate supply,, aggregate . As wages change, the demand, or long-run aggregate supply explain that in the long run, rise or fall both the price level and Real GDP, only Real GDP. or only the price level right the natural unemployment rate. This means that wages are certain left or curve shifts to the until Real GDP equals Natural Real GDP. Finally, you will be affected.
Chapter1: Making Economics Decisions
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Transcribed Image Text:4. The response of the self-regulating economy
The economy of Bandora is currently in a state of long-run equilibrium in which the economy is producing at its Natural Real GDP. The level of Real
GDP is currently 8 trillion dollars, and the price level is 120.
PRICE LEVEL
140
135
130
125
120
115
Changes in a Self-Regulating Economy
AD₂
AD₁
110
65
105
SRAS
100
no
LRAS
0
2
4
B
8
10
12
14
18
REAL GDP (Trillions of dollars)
Suppose there is a sudden decrease in government purchases that causes a shift in aggregate demand from AD₁ to AD2. As a classical economist
a recessionary gap or
from Bandora, you explain that the shift in aggregate demand creates
an inflationary gap You also explain that
Real GDP, the price level, or both the
.
price level and real GDP
will be affected in the short run.
greater than
You note that such a gap leads to an unemployment rate that is or less than
to
short-run aggregate supply,, aggregate
. As wages change, the demand, or long-run aggregate supply
explain that in the long run,
rise or
fall
both the price level and Real GDP, only
Real GDP. or only the price level
right
the natural unemployment rate. This means that wages are certain
left or
curve shifts to the
until Real GDP equals Natural Real GDP. Finally, you
will be affected.
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