Principles of Economics (Second Edition)
2nd Edition
ISBN: 9780393614077
Author: coppock, Lee; Mateer, Dirk
Publisher: W. W. Norton & Company
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Question
Chapter 27, Problem 1QFR
To determine
To explain:
The reason for shift in long-run aggregate
Expert Solution & Answer
Explanation of Solution
During Great Recession, undoubtedly long-run aggregate demand falls which causes this curve to shift leftward. Similarly, the long-run
Causes of shift of long run aggregate demand curve are explained below:
- Higher interest rates: It reduces borrowing and investment level.
- Fall in real wages:Real wages falls in the form of cutting wages by firms as inflation rate erodes real wages value.
- Fall in consumer confidence:This is in the form of negative sequence of events causing delay in consumer spending. Lesser confidence minimizes investment in business too.
- Credit crunch: This causes a fall in advancing loans by banks and consequently lesser investment.
- A period of deflation. Reducing
price levels often inspire people for delayed spending. Besides, deflation adds the actual value of debt more which results in worse off situation of the debtors. - Exchange rate appreciation:This makes exports more costly and finally decreases export demand.
The situation of leftward shift of aggregate demand is shown diagrammatically on Figure 1.
Figure 1
Cause of shift of long run
- Rise in oil prices: Oil price hike is the only main reason forleftward shift of long run aggregate supply curve. This leads to high production cost and ultimately collective supply in the economy to decline.
The situation of leftward shift of aggregate demand is shown diagrammatically on Figure 2.
Figure 2
Economics Concept Introduction
Great Recession:
Great Recession is the term that represents the rapid downfall of economic activities in world economy towards last of 2000s. The magnitude and consequent harm of recession were distinct in different countries.The developed countries like North America and Europe were affected a lot and developing countries like India and China faced development in their economy.
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Refer to the attached Wk 3 Graph for this assignment. The graph shows an increase in demand (shifting of the demand curve from D1 to D2). Choose an application or situation in the economy or a specific economic situation to describe this graph. Take into consideration the impact on quantity and price in your analysis.
Given your analysis, what would cause the situation to go the opposite way? What would cause the situation to go further into the same direction?
Click on the link to study the Economics in the News. Then answer the following questions.
120-
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3. Use the AS-AD model to show the changes in aggregate demand and aggregate supply that occurred in
2016 and 2017 that brought the economy to its situation in mid-2017.
The graph shows the U.S. economy in the second quarter of 2016.
Draw and label the long-run aggregate supply curve in 2017.
Draw and label the aggregate demand curve in 2017.
Draw a point at the short-run macroeconomic equilibrium in the second quarter of 2017.
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Price level (GDP deflator, 2009=100)
LAS 16
112-
110-
108-
106-
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$16.7
100-
16.6
16.7 16.8 16.9 17.0
SAS 16
= SAS17
AD 16
17.1
17.2
17.3
Real GDP (trillions of 2009 dollars)
>>> Draw only the objects specified in the question.
LV
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Price level (GDP deflator, 2009=100)
Fed Raises Rates As Job Gains, Firming Inflation Stoke Confidence
The U.S. Federal Reserve raised interest rates on Wednesday. The rate rise was the second in three months.
This second rise comes in an economy that is growing faster and creating jobs at a more rapid pace. These
gains are accompanied by a rising inflation rate.
140-
130-
Source: Reuters, March 15, 2017
Describe the process by which the Fed's action reported in the news clip flows through the economy.
120-
...
110-
LAS
SAS
→
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When the Fed raises the interest rate,
A. aggregate demand decreases and short-run aggregate supply increases, and the price level falls
B. aggregate demand increases and real GDP increases
C. aggregate demand decreases and the price level falls
D. short-run aggregate supply increases and the price level falls
The graph shows the long-run aggregate supply curve and the short-run aggregate supply curve.
Draw the AD curve to illustrate the state of the economy…
Chapter 27 Solutions
Principles of Economics (Second Edition)
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