2 part question The Greek letter a represents a number that determines how much output responds to unexpectedchanges in the price level. In this case, assume that a = $2 billion. That is, when the actual pricelevel exceeds the expected price level by 1, the quantity of output supplied will exceed the naturallevel of output by $2 billion.Suppose the natural level of output is $60 billion of real GDP and that people expect a price level of110.On the following graph, use the purple line (diamond symbol) to plot this economy's long-runaggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot theeconomy's short-run aggregate supply (AS) curve at each of the following price levels: 100, 105,110, 115, and 120.(?125120AS115110105LRAS100W 9590858075102030405060708010006OUTPUT (Billions of dollars)The short-run quantity of output supplied by firms will fall below the natural level of output whenthe actual price levelthe price level that people expected.PRICE LEVEL In the short run, the quantity of output that firms supply can deviate from the natural level ofoutput if the actual price level in the economy deviates from the expected price level. Severaltheories explain how this might happen.For example, the sticky-price theory asserts that the output prices of some goods and servicesadjust slowly to changes in the price level. Suppose firms announce the prices for their products inadvance, based on an expected price level of 100 for the coming year. Many of the firms sell theirgoods through catalogs and face high costs of reprinting if they change prices. The actual pricelevel turns out to be 110. Faced with high menu costs, the firms that rely on catalog sales choosenot to adjust their prices. Sales from catalogs willcatalogs will respond byhigh costs of adjusting prices, the unexpected increase in the price level causes the quantity ofoutput supplied toand firms that rely onv the quantity of output they supply. If enough firms facethe natural level of output in the short run.Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation:Quantity of Output Supplied = Natural Level of Output + a x (Price LevelActuat Price LevelExpecterThe Greek letter a represents a number that determines how much output responds to unexpectedchanges in the price level. In this case, assume that a = $2 billion. That is, when the actual pricelevel exceeds the expected price level by 1, the quantity of output supplied will exceed the naturallevel of output by $2 billion.Suppose the natural level of output is $60 billion of real GDP and that people expect a price level of110.

Price Level SRAS 100 60+2(100-110) =40 105 60+2(105-110) =50 110 60+2(110-110) =60 115…

On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 100, 105, 110, 115, and 120. (?) 125 120 AS 115 110 105 LRAS 100 W 95 90 85 80 75 10 20 30 40 50 60 70 80 90 100 OUTPUT (Billions of dollars) The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level the price level that people expected. PRICE LEVEL

On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 100, 105, 110, 115, and 120. (?) 125 120 AS 115 110 105 LRAS 100 W 95 90 85 80 75 10 20 30 40 50 60 70 80 90 100 OUTPUT (Billions of dollars) The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level the price level that people expected. PRICE LEVEL

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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