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

Microeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506893

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter9: Price Takers And The Competitive Process

Section: Chapter Questions

Problem 11CQ

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In the short run, the quantity of output supplied by firms can deviate from the natural level of output if the actual price level deviates from the expected price level in the economy. A number of theories explain reasons why this might happen. For example, the misperceptions theory asserts that changes in the price level can temporarily mislead firms about what is happening to their output prices. Consider a soybean farmer who expects a price level of 100 in the coming year. If the actual price level turns out to be 90, soybean prices will (decrease/not change/increase) , and if the farmer mistakenly assumes that the price of soybeans declined relative to other prices of goods and services, she will respond by (raising/lowering) the quantity of soybeans supplied. If other producers in this economy mistake changes in the price level for changes in their relative prices, the unexpected decrease in the price level causes the quantity of output supplied to (fall short of/exceed) the…
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