Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 26, Problem 5.4P
Subpart (a):
To determine
The graphical illustration changes in the price level and equilibrium point.
Subpart (b):
To determine
The graphical illustration changes in the price level and equilibrium point.
Subpart (c):
To determine
The graphical illustration changes in the price level and equilibrium point.
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The graphs illustrate an initial equilibrium for the economy. Suppose that the government increases taxes.
Use the graphs to show the new positions of aggregate demand (AD), short-run aggregate supply (SRAS), and long-run
aggregate supply (LRAS) in both the short run and the long run, as well as the short-run and long-run equilibriums resulting
from this change. Then, indicate what happens to the price level and GDP in the short run and in the long run.
Aggregate price level
Short-run graph
LRAS
SRAS
Short-run equilibrium
Real GDP
AD
Aggregate price level
Long-run graph
LRAS
Long-run equilibrium
Real GDP
AD
SRAS
gate
Consider a macro-economy that was initially at equilibrium. Using an aggregate demand and aggregate supply diagram model of the economy, graphically illustrate and discuss the short-run and long-run effectsof the following events upon the economy:(a) The imposition of a carbon tax upon local big polluting companies;(b) An appreciation in the foreign exchange rate value of the economy’s currency;(c) A major trading partner’s economy fall into recession;(d) The country’s main exports fall in price while the goods the country imports from abroad rise in price
The graph below depicts an increase in aggregate demand due to an increase in net exports. This increase in aggregate demand is
depicted as a shift from AD to AD₁.
Price Level
LRAS
X
AD
Real GDP
AS
AD
Tools
AS,
0
a. In the long run, aggregate supply will adjust to move the economy back to the full-employment level of output. Show this shift using
the graph above.
Instructions: Use the tool provided "AS₁" to show the movement back to full-employment output. Plot only the endpoints of the line,
keeping AS, parallel to AS with the appropriate Intersection (2 points total).
b. How does the new long-run equilibrium compare to the Initial full-employment level before the Increase in net exports?
O The price level is higher, but output is lower.
O The price level is lower, but output remains the same.
O The price level is lower, but output is higher.
O The price level is higher, but output remains the same.
Chapter 26 Solutions
Principles of Economics (12th Edition)
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