Use the figure to answer the following questions. Assume that the economy initially is operating at price level 120 and real output level $870. This output level is the economy's potential (full-employment) level of output. Next, suppose that the price level rises from 120 to 130. 160 AS3 AS 2 150 AS₁ 140 130 120 110 100 90 810 830 850 870 890 910 930 950 Real output (dollars) Instructions: Enter your answers as a whole number. a. By how much will real output Increase in the short run? In the long run? b. Instead, now assume that the price level drops from 120 to 110. Assuming flexible product and resource prices, by how much will real output fall in the short run? In the long run? c. What is the long-run level of output at each of the three price levels shown? Price level

Use the figure to answer the following questions. Assume that the economy initially is operating at price level 120 and real output level $870. This output level is the economy's potential (full-employment) level of output. Next, suppose that the price level rises from 120 to 130. 160 AS3 AS 2 150 AS₁ 140 130 120 110 100 90 810 830 850 870 890 910 930 950 Real output (dollars) Instructions: Enter your answers as a whole number. a. By how much will real output Increase in the short run? In the long run? b. Instead, now assume that the price level drops from 120 to 110. Assuming flexible product and resource prices, by how much will real output fall in the short run? In the long run? c. What is the long-run level of output at each of the three price levels shown? 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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12. Assume that an economy operates according to the sticky-wage model. The nominal wage was set to make labor supply and labor demand equal when the expected price level equaled 120 (as measured by the consumer price index). a. Use a graph of the labor market to illustrate what happens to the quantity of labor employed if the actual price level over the time period when wages are stuck equals 110. b. Use a graph of the production function to illustrate how the quantity of output produced changes if the actual price level equals 110 when the expected price level is 120. c. Given the unexpectedly low price level, will this economy be operating above, below, or at the natural rate?
5. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy deviates from the expected price level. Several theories explain how this might happen. For example, the sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages do, in part because of long-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected price level of 100. If the actual price level turns out to be 110, the firm's output prices will v, and the wages the firm pays its workers will remain fixed at the contracted level. The firm will respond to the unexpected increase in the price level by the quantity of output It supplles. If many firms face simlarly rigld wage contracts, the unexpected Increase In the price level causes the quantity of output…
170 Price 140 level 120 100 D AD5 AD4 AD 3 AD, AD2 3.0 4.0 5.0 6.0 7.0 8.0 Real GDP In Exhibit 20-8, if aggregate demand shifts from AD₁ to AD3, O a. real GDP will increase from $3.0 to $4.0, and the price level will increase from 100 to 140. Ob. real GDP will increase from $3.0 to $7.0, and the price level will increase from 100 to 120. Oc. real GDP will increase from $3.0 to $7.0, and the price level will increase from 100 to 140. Od. real GDP will increase from $3.0 to $4.0, and the price level does not change.
5. a) State whether the following are true or false and explain why. Frictional and structural unemployment are two words for the same thing. i. ii. If an economy is at full employment, the unemployment rate is zero. b) The AD (Aggregate Demand) curve shows the relationship between general price levels and real GDP. i. State and briefly explain the components of aggregate demand (AD). ii. State four factors that would cause • A fall in aggregate demand • An increase in aggregate demand c) i. What is the accelerator effect Explain the difference between the accelerator and the multiplier. Given that Country X has a nominal GDP of $100,000 and its real GDP is 11. 111.
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9. How will (a) an unexpected 3 percent fall in the price level in the goods and services market differ from (b) 1 percent inflation when 4 percent inflation had been expected? What impact would (a) and (b) have on the real price of resources, profit margins, output, and employment? Explain.
33. Refer to Figure 4. As the_____decreases, the amount of ____demanded by all sectors of the economy_____
6. Suppose political turmoil causes a significant decrease in oil production in the middle east. How will real GDP, employment, and the general price level be affected in the short run? 7. How will the event described in question 6 affect real GDP, employment, and the general price level in the long run? Explain in words and a graph.
6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy deviates from the expected price level. Several theories explain how this might happen. For example, the sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages do, in part because of long-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected price level of 100. If the actual price level turns out to be 90, the firm's output prices will , and the wages the firm pays its workers will remain fixed at the contracted level. The firm will respond to the unexpected decrease in the price level by v the quantity of output it supplies. If many firms face similarly rigid wage contracts, the unexpected decrease in the price level causes the quantity of output…