Homework Help is Here – Start Your Trial Now!
Business
Economics
Consider an economy in long-run equilibrium with an aggregate real output of $10 trillion and an aggregate price level of 80. Assume that individuals in the economy have rational expectations and that wages and prices are flexible. Suppose the central bank wishes to raise aggregate real output further by implementing an expansionary monetary policy. There are four possible cases: Case 1 The public correctly anticipates the new long-run price level. The public overestimates the new long-run price level. Case 2 Case 3 The public underestimates the new long-run price level. Case 4 The public does not anticipate any change in the price level. The following four graphs show the short-run and long-run effects of the central bank's action on the economy in each of these cases. Each graph includes the economy's long-run aggregate supply curve (LRAS), its initial aggregate demand curve (AD1), its actual aggregate demand curve after monetary expansion (AD2), its perceived (if different from actual) aggregate demand curve (AD3), its initial short-run aggregate supply curve (SRAS1), its short-run aggregate supply curve based on the new expected price level (SRAS2), and its short-run aggregate supply curve based on the revised (if applicable) expected price level (SRAS3). The black connected points (plus symbols) show the path that the economy takes. Graph G LRAS H Graph P LRAS (?)

Consider an economy in long-run equilibrium with an aggregate real output of $10 trillion and an aggregate price level of 80. Assume that individuals in the economy have rational expectations and that wages and prices are flexible. Suppose the central bank wishes to raise aggregate real output further by implementing an expansionary monetary policy. There are four possible cases: Case 1 The public correctly anticipates the new long-run price level. The public overestimates the new long-run price level. Case 2 Case 3 The public underestimates the new long-run price level. Case 4 The public does not anticipate any change in the price level. The following four graphs show the short-run and long-run effects of the central bank's action on the economy in each of these cases. Each graph includes the economy's long-run aggregate supply curve (LRAS), its initial aggregate demand curve (AD1), its actual aggregate demand curve after monetary expansion (AD2), its perceived (if different from actual) aggregate demand curve (AD3), its initial short-run aggregate supply curve (SRAS1), its short-run aggregate supply curve based on the new expected price level (SRAS2), and its short-run aggregate supply curve based on the revised (if applicable) expected price level (SRAS3). The black connected points (plus symbols) show the path that the economy takes. Graph G LRAS H Graph P LRAS (?)

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

Confused and not sure what the correct answers are

Consider an economy in long-run equilibrium with an aggregate real output of $10 trillion and an aggregate price level of 80. Assume that individuals in the economy have rational expectations and that wages and prices are flexible. Suppose the central bank wishes to raise aggregate real output further by implementing an expansionary monetary policy. There are four possible cases: Case 1 The public correctly anticipates the new long-run price level. Case 2 The public overestimates the new long-run price level. Case 3 The public underestimates the new long-run price level. Case 4 The public does not anticipate any change in the price level. The following four graphs show the short-run and long-run effects of the central bank's action on the economy in each of these cases. Each graph includes the economy's long-run aggregate supply curve (LRAS), its initial aggregate demand curve (AD1), its actual aggregate demand curve after monetary expansion (AD2), its perceived (if different from actual) aggregate demand curve (AD3), its initial short-run aggregate supply curve (SRAS1), its short-run aggregate supply curve based on the new expected price level (SRAS2), and its short-run aggregate supply curve based on the revised (if applicable) expected price level (SRAS3). The black connected points (plus symbols) show the path that the economy takes. 200 180 120 Graph G LRAS 200 180 Graph P (?)
Transcribed Image Text:Consider an economy in long-run equilibrium with an aggregate real output of $10 trillion and an aggregate price level of 80. Assume that individuals in the economy have rational expectations and that wages and prices are flexible. Suppose the central bank wishes to raise aggregate real output further by implementing an expansionary monetary policy. There are four possible cases: Case 1 The public correctly anticipates the new long-run price level. Case 2 The public overestimates the new long-run price level. Case 3 The public underestimates the new long-run price level. Case 4 The public does not anticipate any change in the price level. The following four graphs show the short-run and long-run effects of the central bank's action on the economy in each of these cases. Each graph includes the economy's long-run aggregate supply curve (LRAS), its initial aggregate demand curve (AD1), its actual aggregate demand curve after monetary expansion (AD2), its perceived (if different from actual) aggregate demand curve (AD3), its initial short-run aggregate supply curve (SRAS1), its short-run aggregate supply curve based on the new expected price level (SRAS2), and its short-run aggregate supply curve based on the revised (if applicable) expected price level (SRAS3). The black connected points (plus symbols) show the path that the economy takes. 200 180 120 Graph G LRAS 200 180 Graph P (?)
PRICE LEVEL PRICE LEVEL 200 180 160 140 2 2 2 2 2 2 - 120 200 180 160 140 120 100 0 SRAS Case 1 Case 2 Case 3 Case 4 SRAS SRAS 16 0 24 10 12 REAL GDP (Trillions of dollars) SRAS SRAS Graph G Graph 8 Graph V 3 1 LRAS 6 18 14 LRAS 0 2 REAL GDP (Trillions of dollars) $ $ $ $ 16 16 AD 2 AD 18 20 18 AD AD AD 1 PRICE LEVEL PRICE LEVEL 200 180 100 140 120 60 40 20 0 150 140 130 100 0 5 SRAS SRAS 10 12 6 2 REAL GDP (Trillions of dollars) SR Price Level SRAS SRAS Graph P SRAS 2 LRAS Graph X 2 7 8 9 REAL GDP (Trillions of dollars) LRAS 14 $ $ $ 13 18 AD 2 AD Identify the correct graph for each of the four cases and fill in the following table. SR Real GDP(Trillions) LR Real GDP(Trillions) 20 AD AD AD 2 3 1 (? LR Price Level T
Transcribed Image Text:PRICE LEVEL PRICE LEVEL 200 180 160 140 2 2 2 2 2 2 - 120 200 180 160 140 120 100 0 SRAS Case 1 Case 2 Case 3 Case 4 SRAS SRAS 16 0 24 10 12 REAL GDP (Trillions of dollars) SRAS SRAS Graph G Graph 8 Graph V 3 1 LRAS 6 18 14 LRAS 0 2 REAL GDP (Trillions of dollars) $ $ $ $ 16 16 AD 2 AD 18 20 18 AD AD AD 1 PRICE LEVEL PRICE LEVEL 200 180 100 140 120 60 40 20 0 150 140 130 100 0 5 SRAS SRAS 10 12 6 2 REAL GDP (Trillions of dollars) SR Price Level SRAS SRAS Graph P SRAS 2 LRAS Graph X 2 7 8 9 REAL GDP (Trillions of dollars) LRAS 14 $ $ $ 13 18 AD 2 AD Identify the correct graph for each of the four cases and fill in the following table. SR Real GDP(Trillions) LR Real GDP(Trillions) 20 AD AD AD 2 3 1 (? LR Price Level T
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps with 1 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Cobweb Model
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.
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
SEE MORE TEXTBOOKS