6. Why the aggregate supply curve slopes upward in the short runIn 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 theexpected price level in the economy. A number of theories explain reasons why this might happen.For example, the sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages do, in part because oflong-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected pricelevel of 100. If the actual price level turns out to be 110, the firm's output prices willand the wages the firm pays its workers willremain fixed at the contracted level. The firm will respond to the unexpected increase in the price level bythe quantity of output itsupplies. If many firms face similarly rigid wage contracts, the unexpected increase in the price level causes the quantity of output suppliedthe natural level of output in the short run.Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation:toQuantity of Output Supplied Natural Level of Output + ax (Price Level-Price Level)The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assumethat 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 naturallevel of output by $2 billion.Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 110.On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orangeline segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 100, 105, 110, 115,and 120 On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orangeline segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 100, 105, 110, 115,and 120125120115110PRICE LEVEL88 SM90ASBO75a102030 42 50 60 70OUTPUT (Billions of dollars)60100¢ASLRAS?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 people expected.the price

Aggregate supply curve illustrates the positive relationship between price level and output in an…

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 sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages do, in part because of long-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected price level of 100. If the actual price level turns out to be 110, the firm's output prices will and the wages the firm pays its workers will remain fixed at the contracted level. The firm will respond to the unexpected increase in the price level by the quantity of output it supplies. If many firms face similarly rigid wage contracts, the unexpected increase in the price level causes the quantity of output supplied the natural level of output in the short run. to

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 sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages do, in part because of long-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected price level of 100. If the actual price level turns out to be 110, the firm's output prices will and the wages the firm pays its workers will remain fixed at the contracted level. The firm will respond to the unexpected increase in the price level by the quantity of output it supplies. If many firms face similarly rigid wage contracts, the unexpected increase in the price level causes the quantity of output supplied the natural level of output in the short run. to

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the economy is in a situation of moderate unemployment, and then an exogenous increase of aggregate demand occurs. (Assume the aggregate demand schedule follows the pattern set out by the mainstream story.) Use short run aggregate supply and aggregate demand analysis to discuss in detail the effects of this demand change on the price level and real GDP in the short run. Explain how the situation could change in the long run after the happenings in the first part.
9. Suppose an economy is in long-run equilibrium. Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium (call it point A). Be sure to include both short-run and long-run aggregate supply. The central bank raises the money supply by 5%. Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium (call it point B). Now show the new long-run equilibrium (call it point C). What causes the economy to move from point B to point C? D.) According to the sticky-wage theory of aggregate supply, how do real wages at point A compare to real wages at point B? How do real wages at point A compare to real wages at point C? Please only answer E.) E.) Judging by the impact of the money supply on nominal and real wages, is this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run?
explain what happens in the short run if the Federal Reserve raises interest rates in the economy? Assume that the economy is at full employment before the interest rate increase. Be sure to detail what happens to: aggregate demandthe price levelthe level of GDPand unemployment. (Provide a detailed explanation of the graph provided).
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 of 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, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will v , and firms that rely on catalogs will respond by v the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected…
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9. Suppose an economy is in long-run equilibrium. Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium (call it point A). Be sure to include both short-run and long-run aggregate supply. The central bank raises the money supply by 5%. Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium (call it point B). Now show the new long-run equilibrium (call it point C). What causes the economy to move from point B to point C? D.) According to the sticky-wage theory of aggregate supply, how do real wages at point A compare to real wages at point B? How do real wages at point A compare to real wages at point C? E.) Judging by the impact of the money supply on nominal and real wages, is this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run?
5. 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 of 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-wage theory asserts that output prices adjust more quickly to changes in the price level than wages do, in part because of long-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected price level of 100. If the actual price level turns out to be 110, the firm's output prices will v, and the wages the firm pays its workers will remain fixed at the contracted level. The firm will respond to the unexpected increase in the price level by the quantity of output It supplles. If many firms face simlarly rigld wage contracts, the unexpected Increase In the price level causes the quantity of output…
Suppose that the coronavirus pandemic (COVID 19) in 2020 has resulted in a leftward shift of the aggregate demand curve (it has also shifted the short-run aggregate supply to the left, but let’s ignore this effect here for simplification). A. Use the aggregate-demand/aggregate-supply model to show the effects on output and the price level/inflation in both the short run and long run (assume that the short-run aggregate supply curve is upward sloping). B. Show the adjustment process of the economy from the short run to the long run. C. What is the effect on unemployment in short run and long run? D. Can policymakers use monetary policy (and/or fiscal policy) to accommodate this shock? Describe what happens to the economy in response to this policy action.
2) Use the table above to answer the following questions.a) What is the value of real GDP and price level at the long run macroeconomic equilibrium?b) What is the value of real GDP and price level at the short run macroeconomic equilibrium?c) Is the short-run macroeconomic equilibrium a full-employment equilibrium, below full-employment equilibrium, or above full-employment equilibrium?d) How will this economy return to its long run equilibrium? Explain using self-correctingmechanism.
Explain briefly three important reasons why firms have sticky prices in the short run. Given an example of a price that is sticky in the short run but flexible in the long run.