If the Federal Reserve seeks to prevent secular deflation from taking place as a consequence of economic growth how should it change the quantity of money in circulation? How would this policy action prevent secular deflation? Aggregate Demand Curve(AD) Curve- The aggregate demand is a macro perspective of the individual demand analysis. It is a quantitative aggregate of the individual demand for goods and services in the economy. In other words, it is the total quantity of all goods and services demanded by the economy at different price levels. Like the individual demand curve, the aggregate demand curve is a downward sloping curve implying an inverse relationship between the quantity demanded and price. Graphically, the curve is drawn on a two dimensional frame where the Y-axis is the price level and the X-axis is the real quantity of the goods and services purchased as measured by the Real GDP . Aggregate Supply Curve (AS) Curve- The aggregate supply curve is the quantity of real GDP supplied by the economy at different price levels. It is a quantitative aggregate of the quantity of goods and services supplied by the producers in the economy at varying price levels. Short run ASC (SRAS) Curve- The relationship between the quantity of the real GDP supplied by the economy at different price levels in a period when the all factors of production are not variable and increased prices do not culminate into increased input prices, is represented by the Short Run ASC or SRAS Curve. This is a macroeconomic parallel of the individual supply analysis where higher quantity is supplied at higher prices and is graphically represented as an upward sloping curve implying a direct relationship between quantity supplied and price. Long Run Aggregate Supply Curve (LRAS) Curve- In the long run with all factors variable, the increased price level translates into higher cost of living and higher input prices. The producers adjust the production levels to meet the increased cost of production. Thus, in the long run the supply does not change in reaction to changes in the aggregate demand. This long run relationship between the Aggregate supply and price level is the Long Run Aggregate Supply (LRAS) Curve and is graphically represented as a straight line parallel to the Y-Axis implying perfect inelasticity of supply. Long Run Equilibrium and the AS-AD Model - The point of intersection of the SRAS Curve, the LRAS Curve and the AD Curve is studied under the AS-AD Model and depicts the long run equilibrium in the economy. The figure below depicts an economy in a state of long run equilibrium at Point E where LRAS curve equals the AD curve.

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Chapter 10, Problem 21P

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If the Federal Reserve seeks to prevent secular deflation from taking place as a consequence of economic growth how should it change the quantity of money in circulation? How would this policy action prevent secular deflation?

Aggregate Demand Curve(AD) Curve- The aggregate demand is a macro perspective of the individual demand analysis. It is a quantitative aggregate of the individual demand for goods and services in the economy. In other words, it is the total quantity of all goods and services demanded by the economy at different price levels. Like the individual demand curve, the aggregate demand curve is a downward sloping curve implying an inverse relationship between the quantity demanded and price. Graphically, the curve is drawn on a two dimensional frame where the Y-axis is the price level and the X-axis is the real quantity of the goods and services purchased as measured by the Real GDP.

Aggregate Supply Curve (AS) Curve- The aggregate supply curve is the quantity of real GDP supplied by the economy at different price levels. It is a quantitative aggregate of the quantity of goods and services supplied by the producers in the economy at varying price levels.

Short run ASC (SRAS) Curve- The relationship between the quantity of the real GDP supplied by the economy at different price levels in a period when the all factors of production are not variable and increased prices do not culminate into increased input prices, is represented by the Short Run ASC or SRAS Curve. This is a macroeconomic parallel of the individual supply analysis where higher quantity is supplied at higher prices and is graphically represented as an upward sloping curve implying a direct relationship between quantity supplied and price.

Long Run Aggregate Supply Curve (LRAS) Curve- In the long run with all factors variable, the increased price level translates into higher cost of living and higher input prices. The producers adjust the production levels to meet the increased cost of production. Thus, in the long run the supply does not change in reaction to changes in the aggregate demand. This long run relationship between the Aggregate supply and price level is the Long Run Aggregate Supply (LRAS) Curve and is graphically represented as a straight line parallel to the Y-Axis implying perfect inelasticity of supply.

Long Run Equilibrium and the AS-AD Model- The point of intersection of the SRAS Curve, the LRAS Curve and the AD Curve is studied under the AS-AD Model and depicts the long run equilibrium in the economy.

The figure below depicts an economy in a state of long run equilibrium at Point E where LRAS curve equals the AD curve.

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Exercise 6 Imagine that you head production of a multinational food processing company. The ongoing uncer- tainty about costs means that you are unsure of the future cost of one of your inputs, x2. Your firm's production function is y = f(x1, x2) = x²x²² The output price p is 1000, x1 = 27, and wx₁ = 60. 1. Suppose the current input price is Wx2 = 50. Solve for the optimal choice of x2. 2. Now suppose that the probability the input price remains 50 is 0.65 and the probability that Wx2 60 is 0.35. Solve for the optimal choice of x2. Round down to the nearest integer. = 3. Finally, suppose the costs do actually rise, i.e., Wx2 = 60. Calculate the difference in profit from the uncertainty in (2) vs. the certainty in (1).