Financial crises, such as the one that impacted many developed countries starting in 2007, decrease banks' ability and willingness to make loans. Decreased availability of credit decreases businesses' ability to make investment purchases and consumers' ability to buy goods and services. As a result, a financial crisis is a negative shock for an economy. The following graph shows an economy's aggregate demand curve and its short-run and long-run aggregate supply curves after a financial crisis has pushed it into recession. Suppose that the government decides not to use stabilization policy and allows the economy to adjust on its own. Determine which curve, the aggregate demand curve or the short-run aggregate supply curve, shifts when the economy adjusts in the long run. Use either the purple line (triangle symbols) to plot a new aggregate demand curve or the tan line (dash symbols) to plot a new short-run aggregate supply curve, to show the economy in long-run equilibrium. Make sure the curve you plot is parallel to one of the existing curves. (Note: You can check the slope of a line by hovering over it with your cursor.) PRICE LEVEL 200 180 140 140 120 100 80 60 40 20 LRAS New AD SRAS New SRAS 2 66 8 10 12 14 16 18 20 REAL GDP (Trillions of dollars) Help Clear All Which of the following statements best describes how the economy will adjust on its own in the long run? Nominal wages rise and the SRAS curve shifts to the left until the economy is back at the long-run equilibrium. Low unemployment contributes to an increase in aggregate demand. The aggregate demand curve shifts to the right until the economy is back at the long-run equilibrium. Nominal wages fall and the SRAS curve shifts to the right until the economy is back at the long-run equilibrium. High unemployment contributes to a decrease in aggregate demand. The aggregate demand curve shifts to the left until the economy is back at the long-run equilibrium.
Financial crises, such as the one that impacted many developed countries starting in 2007, decrease banks' ability and willingness to make loans. Decreased availability of credit decreases businesses' ability to make investment purchases and consumers' ability to buy goods and services. As a result, a financial crisis is a negative shock for an economy. The following graph shows an economy's aggregate demand curve and its short-run and long-run aggregate supply curves after a financial crisis has pushed it into recession. Suppose that the government decides not to use stabilization policy and allows the economy to adjust on its own. Determine which curve, the aggregate demand curve or the short-run aggregate supply curve, shifts when the economy adjusts in the long run. Use either the purple line (triangle symbols) to plot a new aggregate demand curve or the tan line (dash symbols) to plot a new short-run aggregate supply curve, to show the economy in long-run equilibrium. Make sure the curve you plot is parallel to one of the existing curves. (Note: You can check the slope of a line by hovering over it with your cursor.) PRICE LEVEL 200 180 140 140 120 100 80 60 40 20 LRAS New AD SRAS New SRAS 2 66 8 10 12 14 16 18 20 REAL GDP (Trillions of dollars) Help Clear All Which of the following statements best describes how the economy will adjust on its own in the long run? Nominal wages rise and the SRAS curve shifts to the left until the economy is back at the long-run equilibrium. Low unemployment contributes to an increase in aggregate demand. The aggregate demand curve shifts to the right until the economy is back at the long-run equilibrium. Nominal wages fall and the SRAS curve shifts to the right until the economy is back at the long-run equilibrium. High unemployment contributes to a decrease in aggregate demand. The aggregate demand curve shifts to the left until the economy is back at the long-run equilibrium.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:11. Applying the AD-AS model
Aa Aa
Financial crises, such as the one that impacted many developed countries starting in 2007, decrease banks' ability
and willingness to make loans. Decreased availability of credit decreases businesses' ability to make investment
purchases and consumers' ability to buy goods and services. As a result, a financial crisis is a negative shock for an
economy.
The following graph shows an economy's aggregate demand curve and its short-run and long-run aggregate supply
curves after a financial crisis has pushed it into recession.
Suppose that the government decides not to use stabilization policy and allows the economy to adjust on its own.
Determine which curve, the aggregate demand curve or the short-run aggregate supply curve, shifts when the
economy adjusts in the long run.
Use either the purple line (triangle symbols) to plot a new aggregate demand curve or the tan line (dash symbols) to
plot a new short-run aggregate supply curve, to show the economy in long-run equilibrium. Make sure the curve you
plot is parallel to one of the existing curves. (Note: You can check the slope of a line by hovering over it with your
cursor.)
PRICE LEVEL
200
LRAS
180
160
140
120
100
80
60
40
20
New AD
SRAS
New SRAS
AD
°
2
6 8 10 12 14 16 18 20
REAL GDP (Trillions of dollars)
Help
Clear All
Which of the following statements best describes how the economy will adjust on its own in the long run?
Nominal wages rise and the SRAS curve shifts to the left until the economy is back at the long-run equilibrium.
Low unemployment contributes to an increase in aggregate demand. The aggregate demand curve shifts to
the right until the economy is back at the long-run equilibrium.
Nominal wages fall and the SRAS curve shifts to the right until the economy is back at the long-run
equilibrium.
High unemployment contributes to a decrease in aggregate demand. The aggregate demand curve shifts to
the left until the economy is back at the long-run equilibrium.
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