Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 10, Problem 8CQ
To determine
Identify the self-correcting mechanism to direct the economy to offset the long-run equilibrium.
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Suppose an economy is at the short run equilibrium which its current output level called Y1, is below the full employment output level called Yf. If the government does nothing, discuss how the economy restores its long run equilibrium level of output?
Are all prices in the economy equally inflexible? Which ones show large amounts of short-run flexibility?
What would a Keynesian likely recommend in response to a recession? What would a neoclassical likely recommend? Why would a Keynesian policy response not make much sense in response to a minor recession like the one that occurred in 1990? What would be the cost of letting the economy adjust by itself to a new long run equilibrium?
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Economics: Private and Public Choice (MindTap Course List)
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- In long-run macroeconomic equilibrium, aggregate quantity demanded equals aggregate quantity supplied equals potential GDP. Select one: True Falsearrow_forwardA recessionary gap exists when the macro economy is in equilibrium at less than the potential output of the the economy because aggregate demand is insufficient to fully employ all of society' s resources. In other words, the equilibrium (AD = AS) occurs to the left of the vertical long-run supply curve. At this point, potential output is reached ( full employment) and if any unemployment occurs, then it is due to structural or frictional; that is, the economy is at its natural rate of employment. True Falsearrow_forwardA recessionary gap exists when the macro economy is in equilibrium at less than the potential output of the the economy because aggregate demand is insufficient to fully employ all of society' s resources. In other words, the equilibrium (AD = AS) occurs to the left of the vertical long-run supply curve. At this point, potential output is reached ( full employment) and if any unemployment occurs, then it is due to structural or frictional; that is, the economy is at its natural rate of employment. True or falsesarrow_forward
- or False: The economy is currently in short-run equilibrium.arrow_forwardThe figure to the right shows an economy in an initial long-run equilibrium at point A a. Using the line drawing tool, show how, if at all, the equilibrium real GDP and the long-run equilibrium price level are affected by an income tax rebate (the return of previously paid taxes) from the government to households, which they can apply only to purchases of goods and services. Properly label this line. Carefully follow the instructions above, and only draw the required objects b. According to your graph, the equilibrium price level here to search O while the equilibrium real GDP ▼arrow_forwardThe task I am struggling with: The economy is in short-run macroeconomic equilibrium at point E1 in the accompanying diagram (see the picture). Based on the diagram, answer the following questions. a) Is the economy facing an inflationary or recessionary gap? b) What policies can the government implement that might bring the economy back to long-run macroeconomic equilibrium? Illustrate with a diagram. c) If the government did not intervene to close this gap, would the economy return to long-run macroeconomic equilibrium? Explain and illustrate with a diagram.Thank you very much for your help.arrow_forward
- In the past two decades, the government of Qatar has made significant investments to increase the level of infrastructure and human capital in the country. Suppose the accompanying graph illustrates the aggregate demand (AD), short‑run aggregate supply (SRAS), and long‑run aggregate supply (LRAS) curves for Qatar before these investments were made. Assume all three curves were impacted by these investments. Adjust the graph to show Qatar’s new long‑run macroeconomic equilibrium.arrow_forwardHow do Keynesians and classicals differ in their beliefs about how long it takes the economy to reach long-run equilibrium? What implications do these differences in beliefs have for Keynesian and classical views about the usefulness of antirecessionary policies? About the types of shocks that cause most recessions?arrow_forwardGive typing answer with explanation and conclusionarrow_forward
- Aggregate Supply: Explain whether the economy is currently operating in the Keynesian, intermediate or neoclassical portion of the economy's aggregate curve. Also, point out a time when the economy may have been operating at another portion of the aggregate supply curve.arrow_forwardWhat happens when firms and workers underestimate future prices in the economy? Focus your answer on what would happen to actual output as opposed to the expected potential output. (Course is macroeconomics).arrow_forwardSuppose England's economy is in long-run equilibrium. As a result of the coronavirus, the British government orders all non-essential businesses to close and issue “shutter in” and other “stay at home” directives requiring its citizens and residents not to leave their residences absent emergencies and/or to purchase food and groceries from markets (that is, people cannot, for example, go to restaurants, movies or sporting events and the like.) If so, then we would predict that in the short-run England's A. real GDP will fall and the price level might rise, fall, or stay the same. B. real GDP will rise and the price level might rise, fall, or stay the same. C. the price level will rise, and real GDP might rise, fall, or stay the same. D. the price level will fall, and real GDP might rise, fall, or stay the samearrow_forward
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