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 B? 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

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question

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 B?

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

60
50
40
30
20
10
0
ㅇ
60
ㅇㅇ 085 gg
50
40
30
20
10
P level
0
P level
0+
10
0 10
Figure A
LRAS
20 30 40
real GDP = Q
Figure C
LRAS
20 30
real GDP = Q
40
ASO
AS1
ADo
50
ASo
AD1
ADO
50
60
50
40-
30
20
10
0
60
P level
50
40
30
20
10
0
0 10
P level
0 10
Figure B
LRAS
20 30 40
real GDP = Q
Figure D
LRAS
20 30 40
real GDP = Q
AS1
ASO
|
ADo
1
50
ASO
ADo
AD1-
50
Transcribed Image Text:60 50 40 30 20 10 0 ㅇ 60 ㅇㅇ 085 gg 50 40 30 20 10 P level 0 P level 0+ 10 0 10 Figure A LRAS 20 30 40 real GDP = Q Figure C LRAS 20 30 real GDP = Q 40 ASO AS1 ADo 50 ASo AD1 ADO 50 60 50 40- 30 20 10 0 60 P level 50 40 30 20 10 0 0 10 P level 0 10 Figure B LRAS 20 30 40 real GDP = Q Figure D LRAS 20 30 40 real GDP = Q AS1 ASO | ADo 1 50 ASO ADo AD1- 50
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 4 steps

Blurred answer
Knowledge Booster
Equilibrium Point
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education