Aggregate Demand Curve ( AD ): It shows how price and the quantity demanded are related to each other. The curve is negatively slopped which means that when prices rise the quantity demanded falls. Fiscal Policy: It includes government expenditure and taxes. When government expenditure is increased or taxes are decreased then Ad curve shifts rightward and vice versa. Monetary Policy : It includes money supply changes. When money supply increases Ad curve shifts rightward and vice versa. Aggregate Supply Curve ( AS ): It shows how price and the quantity supplied are related to each other. The curve is positively slopped which means that when prices rise, the quantity supplied also rises. The curve depends on the duration of time. Short Run Aggregate Supply ( SRAS ): It is a positively slopped curve in which supply increases when price rises. The reason for upward slopping is that the wages are sticky in short run due to formal or informal contracts. At higher aggregate prices there is higher profit leading to high level of output. Long Run Aggregate Supply ( LRAS ): It is a vertical curve which means it is independent of price. When price increases there is no change in quantity supplied. In the long run nominal wages are not fixed rather it can be negotiated. Supply Shock: In every economy it is a type of sudden event that leads to change in the supply of output for short period of time. Supply may decrease or increase depending upon the type of shock. Positive Supply Shock: It is a type of shock in which aggregate supply in an economy expands. It causes price to increase. It is a rare phenomenon. Negative Supply Shock: It is a type of shock in which aggregate supply in an economy degrades.

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Chapter 12, Problem 14P

To determine

Concept Introduction:

Aggregate Demand Curve ( AD ): It shows how price and the quantity demanded are related to each other. The curve is negatively slopped which means that when prices rise the quantity demanded falls.

Fiscal Policy: It includes government expenditure and taxes. When government expenditure is increased or taxes are decreased then Ad curve shifts rightward and vice versa.

Monetary Policy: It includes money supply changes. When money supply increases Ad curve shifts rightward and vice versa.

Aggregate Supply Curve ( AS ): It shows how price and the quantity supplied are related to each other. The curve is positively slopped which means that when prices rise, the quantity supplied also rises. The curve depends on the duration of time.

Short Run Aggregate Supply ( SRAS ): It is a positively slopped curve in which supply increases when price rises. The reason for upward slopping is that the wages are sticky in short run due to formal or informal contracts. At higher aggregate prices there is higher profit leading to high level of output.

Long Run Aggregate Supply ( LRAS ): It is a vertical curve which means it is independent of price. When price increases there is no change in quantity supplied. In the long run nominal wages are not fixed rather it can be negotiated.

Supply Shock: In every economy it is a type of sudden event that leads to change in the supply of output for short period of time. Supply may decrease or increase depending upon the type of shock.

Positive Supply Shock: It is a type of shock in which aggregate supply in an economy expands. It causes price to increase. It is a rare phenomenon.

Negative Supply Shock: It is a type of shock in which aggregate supply in an economy degrades.

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PART II: Multipart Problems wood or solem of triflussd aidi 1. Assume that a society has a polluting industry comprising two firms, where the industry-level marginal abatement cost curve is given by: MAC = 24 - ()E and the marginal damage function is given by: MDF = 2E. What is the efficient level of emissions? b. What constant per-unit emissions tax could achieve the efficient emissions level? points) c. What is the net benefit to society of moving from the unregulated emissions level to the efficient level? In response to industry complaints about the costs of the tax, a cap-and-trade program is proposed. The marginal abatement cost curves for the two firms are given by: MAC=24-E and MAC2 = 24-2E2. d. How could a cap-and-trade program that achieves the same level of emissions as the tax be designed to reduce the costs of regulation to the two firms?