Homework Help is Here – Start Your Trial Now!
Business
Economics
Exhibit 24-1 shows the short run and long run equilibrium in an aggregate demand-aggregate supply model. If the economy is initially at point G which of the following changes will most likely be observed when a contractionary fiscal policy is adopted? a) The SRAS curve will shift to the left b) Real GDP will increase above Y2 c)The aggregate demand curve will shift from AD** to AD d)The LRAS curve will shift to the right

Exhibit 24-1 shows the short run and long run equilibrium in an aggregate demand-aggregate supply model. If the economy is initially at point G which of the following changes will most likely be observed when a contractionary fiscal policy is adopted? a) The SRAS curve will shift to the left b) Real GDP will increase above Y2 c)The aggregate demand curve will shift from AD** to AD d)The LRAS curve will shift to the right

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

Exhibit 24-1 shows the short run and long run equilibrium in an aggregate demand-aggregate supply model. If the economy is initially at point G which of the following changes will most likely be observed when a contractionary fiscal policy is adopted?

a) The SRAS curve will shift to the left

b) Real GDP will increase above Y2

c)The aggregate demand curve will shift from AD** to AD

d)The LRAS curve will shift to the right

### Exhibit 24-1: AD-AS Model Analysis The graph in Exhibit 24-1 represents the Aggregate Demand-Aggregate Supply (AD-AS) model, which illustrates the relationship between the overall price level and the real GDP in an economy. **Axes:** - The vertical axis (Y-axis) represents the Price Level. - The horizontal axis (X-axis) represents Real GDP. **Curves and Points:** 1. **LRAS (Long-Run Aggregate Supply) Curve:** A vertical line indicating the economy's potential output (real GDP) at full employment, which does not change with the price level. 2. **SRAS (Short-Run Aggregate Supply) Curve:** An upward-sloping curve showing the relationship between the price level and the quantity of real GDP supplied in the short run. 3. **AD (Aggregate Demand) Curve:** A downward-sloping curve that shows the relationship between the price level and the quantity of real GDP demanded. 4. **AD***, AD, AD**: These are different positions of the aggregate demand curve, indicating changes in aggregate demand. - **AD***: Aggregate Demand at lower levels. - **AD**: Aggregate Demand at an intermediate level. - **AD**: Aggregate Demand at a higher level. **Equilibrium Points:** - **Point F:** Intersection of AD and SRAS curves at price level P0 and real GDP Y0. - **Point E:** Intersection after a shift in the AD curve to AD* at price level P1 and real GDP Y1. - **Point G:** Intersection after a further shift in the AD curve to AD** at price level P2 and real GDP Y2. **Explanation:** - As the AD curve shifts from AD to AD* to AD**, the equilibrium price level increases from P0 to P1 to P2 respectively. - Correspondingly, real GDP increases from Y0 to Y1 to Y2. - These shifts demonstrate how changes in aggregate demand affect the price level and real GDP in the short run. Understanding this model is crucial for analyzing economic policies and their impact on inflation, unemployment, and overall economic growth.
Transcribed Image Text:### Exhibit 24-1: AD-AS Model Analysis The graph in Exhibit 24-1 represents the Aggregate Demand-Aggregate Supply (AD-AS) model, which illustrates the relationship between the overall price level and the real GDP in an economy. **Axes:** - The vertical axis (Y-axis) represents the Price Level. - The horizontal axis (X-axis) represents Real GDP. **Curves and Points:** 1. **LRAS (Long-Run Aggregate Supply) Curve:** A vertical line indicating the economy's potential output (real GDP) at full employment, which does not change with the price level. 2. **SRAS (Short-Run Aggregate Supply) Curve:** An upward-sloping curve showing the relationship between the price level and the quantity of real GDP supplied in the short run. 3. **AD (Aggregate Demand) Curve:** A downward-sloping curve that shows the relationship between the price level and the quantity of real GDP demanded. 4. **AD***, AD, AD**: These are different positions of the aggregate demand curve, indicating changes in aggregate demand. - **AD***: Aggregate Demand at lower levels. - **AD**: Aggregate Demand at an intermediate level. - **AD**: Aggregate Demand at a higher level. **Equilibrium Points:** - **Point F:** Intersection of AD and SRAS curves at price level P0 and real GDP Y0. - **Point E:** Intersection after a shift in the AD curve to AD* at price level P1 and real GDP Y1. - **Point G:** Intersection after a further shift in the AD curve to AD** at price level P2 and real GDP Y2. **Explanation:** - As the AD curve shifts from AD to AD* to AD**, the equilibrium price level increases from P0 to P1 to P2 respectively. - Correspondingly, real GDP increases from Y0 to Y1 to Y2. - These shifts demonstrate how changes in aggregate demand affect the price level and real GDP in the short run. Understanding this model is crucial for analyzing economic policies and their impact on inflation, unemployment, and overall economic growth.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Aggregate Demand
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
  • SEE MORE 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
SEE MORE TEXTBOOKS