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 the 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.

Question

Want to see the full answer?

Answer 1

Question

Chapter 16, 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 the 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.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Consider an economy that exhibits both population growth (L grows at rate n) and technological progress (A grows at rate a) described by the production function, Y = F(K, AL) = Ka (AL)¹-α Here K is capital and Y is output. (a) Show that this production function exhibits constant returns to scale. [2 marks] (b) What is the per-effective-worker production function, y = f(k), (where y = Y/AL k K/AL)? (Show your working.) [2 marks] (c) Find expressions for the steady-state capital-output ratio, capital stock per effective worker, and output per effective worker, as a function of the saving rate (s), the depreciation rate (8), the population growth rate (n), the rate of technological progress (a), and the coefficient a. (You may assume the condition that capital per effective worker evolves according to Ak = sf (k) - (a+n+8)k.) [5 marks] (d) Show that at the Golden Rule steady state the saving rate for this economy is equal to the parameter a. [6 marks]

A firm faces the following production function, Y = AKα L¹-a (1) Here Y is output, K is capital, L is fixed labour, and A is a measure of technology. The firm uses an optimal amount of capital determined by the condition, MPK = r +8 (2) Where MPK is the marginal productivity of capital, r is the real interest rate, and ♪ is the depreciation rate. (a) Using equations (1) and (2) find an expression for K*, the optimal amount of capital the firm should use. [3 marks] (b) Referring to your result from part (a), comment on what happens to K* when each of the following variables change (holding other variables constant), (i) The measure of technology (A) falls (ii) The depreciation rate (8) increases (iii) The real interest rate (r) increases [2 marks] [2 marks] [2 marks] [Hint: For each of parts (i)-(iii) you are being asked to comment on what happens to K* if just the variable mentioned in the question part changes. Your answer should state whether K* increases, decreases, or stays the…

In the week-4 materials, when deriving labour supply, we assumed that the substitution effect dominated the income effect. What impact would there be on labour supply if this was not the case? Briefly investigate how such a change could theoretically affect the imposition of a minimum wage above the market clearing wage. (Your answer is likely to benefit from diagrammatic support.)