Answered: Assuming Aggregate Demand and Aggregate…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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27. Assuming Aggregate Demand and Aggregate Supply are initially at ADo and ASo respectively, which of the following explains the adjustment towards long-run equilibrium depicted in Figure C? a) Unemployment (resulting from the short-run equilibrium being below LRAS) causes wages to decline, which increases AS till long-run equilibrium is attained at full employment level of income and a lower price level. b) Government spending is increased, increasing AD to a level sufficient to attain long-run equilibrium at full employment level of income and a higher price level. c) In attempting to produce beyond the economy's natural level of GDP, producers bid up wages and prices of other resources, causing the AS to decrease to the point where long-run equilibrium is restored. d) Taxes are increased reducing AD to a level consistent with long-run equilibrium.

Fig. A
Fig. B
P level
60
P level
60
ASo
AS1
LRAS
LRAS
50
AS1
50
ASo
40
40
30
30
20
20
10
10
ADo
ADo_
10
20
30
40
50
10
20
30
40
50
real GDP = Q
real GDP = Q
Fig. C
Fig. D
P level
60
P level
60
ASo
LRAS
LRAS
50
50
ASo
40
40
30
30
20
20
AD1
10
10
ADo
AD1
CADO
10
20
30
40
50
20
30
40
50
real GDP = Q
real GDP = Q
10

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