Homework (Ch 14)6. Increase in the aggregate demand and long-run aggregate supply curvesConsider the dynamic aggregate demand and aggregate supply diagram for a hypothetical economy. Between 2041 and 2042, the aggregate demandcurve (AD) shifts from AD₁ to AD2, the short-run aggregate supply curve (SRAS) shifts from SRAS, to SRAS2, and the long-run aggregate supplycurve (LRAS) shifts from LRAS₁ to LRAS₂.PRICE LEVEL (CPI)106LRAS,AD₁LRAS₂SRAS₁6.6REAL GDP (Trillions of dollars)6.8SRAS₂AD2 Homework (Ch 14)PRICE L106AD₁6.6REAL GDP (Trillions of dollars)The inflation rate between 2041 and 2042 is6.8The growth rate of full-employment output between 2041 and 2042 isAD2Which of the following best explains the economic developments from 2041 to 2042?O The economy experienced cost-push inflation.O The economy operated at full-employment output in 2041, but the subsequent increase in aggregate demand was not enough to restorethe economy to full-employment output, leading to a recessionary gap in 2042.A strong increase in aggregate demand allowed the economy to grow out of a recessionary gap in 2041 to full employment in 2042.An increase in government purchasesAn increase in consumption spendingWhich of the following are possible reasons for the rightward shift of the LRAS curve between 2041 and 2042? Check all that apply.An increase in the size of the labor force

In the AD-AS model, AD is negatively sloped, but AS is positively sloped only in the short run. But, in the long run, when all productive resources are fully utilized, then the economy reaches its full employment level of output, then AS becomes vertical. Any increase in AD will only lead to an inflation in the long run.Price in 2041 = 106 Price in 2042 = 110 Inflation rate: π = Price in 2042 - Price in 2041Price in 2041 × 100π = 110 - 106106 × 100π ≃ 3.8% Full employment output in 2041 = 6.6 Full employment output in 2042 = 6.8 Growth rate of full employment output: y˙ = Full employment output in 2042 - Full employment output in 2041Full employment output in 2041 × 100y˙ = Growth rate of full employment output˙y˙ = 6.8 - 6.66.6 × 100y˙ ≃ 3.03% From the diagram, it can be observed that the economy operated at full employment in 2041 as AD1 = SRAS1 = LRAS1 But, the subsequent increase in AD to AD2 is not matched by SRAS2 to reach full employment level of output. As a result, there is a recessionary gap in 2042. Option B is the correct answer. Option A is incorrect because the shift in AD is greater than the shift in SRAS. So, the economy has experienced a demand pull inflation. Option C is incorrect because the economy was in full employment level in 2041. But, the mismatch in increase of AD and SRAS from 2041 level has led to a recessionary gap in 2042.The LRAS curve shifts rightward from 2041 to 2042 due to an increase in the size of labor force as it leads to increase in productive capacity of the economy. Option C is the correct answer. Options A and B are incorrect because government spending and consumption expenditure are components of AD. Any increases in these components will shift AD to the right.Therefore,π = 3.8%y˙ = 3.03%Option B is the correct answer because a mismatch in the increase in AD and SRAS has led to a recessionary gap in output for 2042 unlike 2041Option C is the correct answer as increase in work force increase productive capacity and shifts LRAS curve rightward.

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The growth rate of full-employment output between 2041 and 2042 is Which of the following best explains the economic developments from 2041 to 2042? O The economy experienced cost-push inflation. O The economy operated at full-employment output in 2041, but the subsequent increase in aggregate demand was not enough to restore the economy to full-employment output, leading to a recessionary gap in 2042. A strong increase in aggregate demand allowed the economy to grow out of a recessionary gap in 2041 to full employment in 2042. Which of the following are possible reasons for the rightward shift of the LRAS curve between 2041 and 2042? Check all that apply. An increase in government purchases An increase in consumption spending An increase in the size of the labor force

The growth rate of full-employment output between 2041 and 2042 is Which of the following best explains the economic developments from 2041 to 2042? O The economy experienced cost-push inflation. O The economy operated at full-employment output in 2041, but the subsequent increase in aggregate demand was not enough to restore the economy to full-employment output, leading to a recessionary gap in 2042. A strong increase in aggregate demand allowed the economy to grow out of a recessionary gap in 2041 to full employment in 2042. Which of the following are possible reasons for the rightward shift of the LRAS curve between 2041 and 2042? Check all that apply. An increase in government purchases An increase in consumption spending An increase in the size of the labor force

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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