Question:The attached picture shows the aggregate demand/aggregate supply situation in the U.S. What is the value of actual GDP? What is the value of the GDP deflator? Assume that people and businesses become pessimistic about the future of the economy; how will this affect the graph above in the short run? (i.e., which curve(s) will shift, and in which direction?) After the short-run event in part b, what will happen to actual GDP? What will happen to the price level? After the short-run event in part b, describe how the economy is doing in terms of the business cycle (i.e., recession, full employment, expansion). What long-run adjustments will be made in this economy as a result of the short-run changes in part c? How will the curve(s) shift in response to these long-run adjustments? After the long-run adjustments in part e, describe how the economy is doing in terms of the business cycle (i.e., recession, full employment, expansion). ### Understanding Aggregate Demand and Aggregate SupplyThe graph above illustrates the relationships between aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) in an economy.#### Graph Breakdown:- **Y-axis (Vertical):** Represents the Price Level measured by the GDP Deflator, a metric used to adjust nominal GDP to account for changes in price levels.- **X-axis (Horizontal):** Represents Real GDP, which is the measure of the value of economic output adjusted for price changes (inflation or deflation).#### Curves:1. **AD (Aggregate Demand):** Displayed as a blue solid line, it slopes downward from left to right. This negative slope indicates that as the price level decreases, the quantity of Real GDP demanded increases. 2. **SRAS (Short-Run Aggregate Supply):** Represented by a red dashed line, it slopes upward from left to right. This positive slope implies that as the price level increases, the quantity of Real GDP supplied in the short run also increases.3. **LRAS (Long-Run Aggregate Supply):** Shown by a vertical green dotted line at a Real GDP value of 20. This vertical line indicates that in the long-run, the supply of Real GDP is fixed and does not change with price level. The economy is at its full employment output level.#### Key Concepts:- **Equilibrium:** The intersection of the AD and SRAS curves indicates the economy's short-run equilibrium. Here, we can determine both the prevailing price level and the quantity of real GDP produced.- **Long-Run Equilibrium:** It is reached when the AD and SRAS curves intersect the LRAS curve. Here, the economy is producing at full employment output, and any deviations caused by shifts in AD or SRAS will eventually return to this equilibrium in the long run.Understanding these relationships helps in analyzing economic policies and their effects on inflation, output, and unemployment in the short-term and long-term.

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ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The attached picture shows the aggregate demand/aggregate supply situation in the U.S.

What is the value of actual GDP? What is the value of the GDP deflator?
Assume that people and businesses become pessimistic about the future of the economy; how will this affect the graph above in the short run? (i.e., which curve(s) will shift, and in which direction?)
After the short-run event in part b, what will happen to actual GDP? What will happen to the price level?
After the short-run event in part b, describe how the economy is doing in terms of the business cycle (i.e., recession, full employment, expansion).
What long-run adjustments will be made in this economy as a result of the short-run changes in part c? How will the curve(s) shift in response to these long-run adjustments?
After the long-run adjustments in part e, describe how the economy is doing in terms of the business cycle (i.e., recession, full employment, expansion).

### Understanding Aggregate Demand and Aggregate Supply

The graph above illustrates the relationships between aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) in an economy.

#### Graph Breakdown:
- **Y-axis (Vertical):** Represents the Price Level measured by the GDP Deflator, a metric used to adjust nominal GDP to account for changes in price levels.
- **X-axis (Horizontal):** Represents Real GDP, which is the measure of the value of economic output adjusted for price changes (inflation or deflation).

#### Curves:
1. **AD (Aggregate Demand):** Displayed as a blue solid line, it slopes downward from left to right. This negative slope indicates that as the price level decreases, the quantity of Real GDP demanded increases.
2. **SRAS (Short-Run Aggregate Supply):** Represented by a red dashed line, it slopes upward from left to right. This positive slope implies that as the price level increases, the quantity of Real GDP supplied in the short run also increases.
3. **LRAS (Long-Run Aggregate Supply):** Shown by a vertical green dotted line at a Real GDP value of 20. This vertical line indicates that in the long-run, the supply of Real GDP is fixed and does not change with price level. The economy is at its full employment output level.

#### Key Concepts:
- **Equilibrium:** The intersection of the AD and SRAS curves indicates the economy's short-run equilibrium. Here, we can determine both the prevailing price level and the quantity of real GDP produced.
- **Long-Run Equilibrium:** It is reached when the AD and SRAS curves intersect the LRAS curve. Here, the economy is producing at full employment output, and any deviations caused by shifts in AD or SRAS will eventually return to this equilibrium in the long run.

Understanding these relationships helps in analyzing economic policies and their effects on inflation, output, and unemployment in the short-term and long-term.

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