Sub part (a):
Impact of different views on inflation on the economy's equilibrium.
Sub part (a):
Explanation of Solution
The supply is dependent upon the
The
When the new chairman is one with the view that the inflation is not a big issue on the economy, the economy would identify the chairman as the silent supporter of the inflation, and they will expect that the chairman will not introduce the active policies to fight against and control the inflation in the economy. As a result, the public will expect that the rise in the inflation and the price level are likely to rise.
Concept introduction:
Aggregate demand curve: It is the curve that shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms, and the government.
Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersect with each other. There will be no excess demand or
Sub part (b):
Impact of different views on inflation on the economy's equilibrium.
Sub part (b):
Explanation of Solution
When the people expect higher inflation for the next year, they will start to calculate the changes in the price level. According to the expected higher level of inflation over the next year, they will expect higher cost of living for the next year. As a result of this, they will demand higher nominal wage rate for the next year with the employers.
Concept introduction:
Aggregate demand curve: It is the curve that shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms, and the government.
Aggregate supply curve: In the short run, it is a curve that shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.
Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersect with each other. There will be no excess demand or excess supply in the economy at the equilibrium.
Sub part (c):
Impact of different views on inflation on the economy's equilibrium.
Sub part (c):
Explanation of Solution
The profit of the firm is the difference between the total cost and the total revenue of the firm's products. When the total cost is higher than the total revenue, the firm faces the loss and if it is vice versa, the firm earns the profit. When the nominal wages increase, it increases the cost of production. So at any given price point, the increase in the labor cost reduces the profitability of the firm because it increases the total cost of production of the firm.
Concept introduction:
Aggregate demand curve: It is the curve that shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms, and the government.
Aggregate supply curve: In the short run, it is a curve that shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.
Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersect with each other. There will be no excess demand or excess supply in the economy at the equilibrium.
Sub part (d):
Impact of different views on inflation on the economy's equilibrium.
Sub part (d):
Explanation of Solution
When the profitability of the firm decreases due to the increased nominal wage rate of the labor, the supply will decline in the economy, which will cause the short run aggregate supply curve to shift upward and this can be illustrated on the graph as follows:
Concept introduction:
Aggregate demand curve: It is the curve that shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms, and the government.
Aggregate supply curve: In the short run, it is a curve that shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.
Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersect with each other. There will be no excess demand or excess supply in the economy at the equilibrium.
Sub part (e):
Impact of different views on inflation on the economy's equilibrium.
Sub part (e):
Explanation of Solution
When the aggregate demand is held constant without any change and the aggregate supply shifts to AS2 as given above, it will lead to lower output in the economy along with higher price level in the economy. This is because when the SRAS curve shifts upward, the new equilibrium will be derived at point B, which is lying above and leftward to the initial equilibrium point A.
Concept introduction:
Aggregate demand curve: It is the curve that shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms, and the government.
Aggregate supply curve: In the short run, it is a curve that shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.
Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersect with each other. There will be no excess demand or excess supply in the economy at the equilibrium.
Sub part (f):
Impact of different views on inflation on the economy's equilibrium.
Sub part (f):
Explanation of Solution
The situation explained above that the total output of the economy falls, whereas the price level in the economy increases leading to the situation of stagflation and this means that the appointment choice of the new chairman was not a wise choice.
Concept introduction:
Aggregate demand curve: It is the curve that shows the relationship between the price level in the economy and the quantity of real GDP demanded by the economic agents such as the households, firms, and the government.
Aggregate supply curve: In the short run, it is a curve that shows the relationship between the price level in the economy and the supply in the economy by the firms. In the long run, it shows the relationship between the price level and the level of quantity supplied by the firms.
Equilibrium: The equilibrium in the economy is the point where the economy's aggregate demand curve and the aggregate supply curve intersect with each other. There will be no excess demand or excess supply in the economy at the equilibrium.
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Chapter 23 Solutions
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- Wolfgang is a typical producer in a perfectly competitive piano industry (i.e., all other producers of pianos face the same costs as Wolfgang). The following production and cost data apply to the long run as well as the short run. Fixed costs (rent) are unrecoverable in the short run and are equal to $2400 per month. Variable costs consist of raw materials (wire, wood, plastic), which cost $1000 per piano, and the $40 per hour opportunity cost of Wolfgang's time. Wolfgang's production function is given in the table at right. Wolfgang will shut down if the price per piano is less than OA. $3000. B. $4000. O C. $5000. ○ D. None of the above. Pianos (Q) Hours (L) Raw Materials ( 0 0 0 1 100 1000 2 150 2000 3 240 3000 4 400 4000arrow_forwardP2 P₁ $ per unit Using the graph below, determine which statement is TRUE. MC1 SRATC₁ Q1 Q₂ MC2 SRATC2 LRAC ✓ LEA Quantityarrow_forwardUsing the grapns below, wnicn snow the snort-run cost curves for 3 perfectly competitive firms in the same industry, determine whether the industry is in long-run equilibrium or not. Q Q Firm A QA MC ATC Output Firm B QB MC ATC Firm C MC ATC Output Output Qc If Firms A, B and C are in the same industry, is this industry in long-run equilibrium? ○ A. Yes, because P = MC = MR for each of the 3 firms. ○ B. No, because Firm A is not producing at a profit-maximizing level of output. ○ C. Yes, because all 3 firms are producing at their minimum average total cost. OD. The answer is uncertain since it's unknown whether the firms are producing at the minimum efficient scale or not. ○ E. No, because if the industry were in equilibrium, all 3 firms would be earning zero economic profits.arrow_forward
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