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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Chapter 27, Problem 2.7P
To determine
The short-run
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The following graph plots aggregate demand (AD2027AD2027) and aggregate supply (AS) for the imaginary country of Cotopaxi in the year 2027.
Suppose the natural level of output in this economy is $6 trillion.
On the following graph, use the green line (triangle symbol) to plot the long-run aggregate supply (LRAS) curve for this economy.
Economists forecast that if the government takes no action and the economy continues to grow at the current rate, aggregate demand in 2028 will be given by the curve labeled ADAADA, resulting in the outcome given by point A. If, however, the government pursues an expansionary policy, aggregate demand in 2028 will be given by the curve labeled ADBADB, resulting in the outcome given by point B.
The following table presents projections for the unemployment rates that would occur at point A and point B. Consider the potential rate of inflation between 2027 and 2028, depending on whether the economy moves from the initial price level of 102 to the…
Determinants of aggregate demand
The following graph shows a decrease in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the left from AD1AD1 to AD2AD2, causing the quantity of output demanded to fall at all price levels. For example, at a price level of 140, output is now $200 billion, where previously it was $300 billion.
In the past two decades, the government of Qatar has made significant investments to increase the level of infrastructure and human capital in the country.
Suppose the accompanying graph illustrates the aggregate demand (AD), short‑run aggregate supply (SRAS), and long‑run aggregate supply (LRAS) curves for Qatar before these investments were made. Assume all three curves were impacted by these investments.
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Chapter 27 Solutions
Principles of Economics (12th Edition)
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- Determinants of aggregate demand The following graph shows an increase in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the right from AD1AD1 to AD2AD2, causing the quantity of output demanded to rise at all price levels. For example, at a price level of 140, output is now $400 billion, where previously it was $300 billion.arrow_forwardThe short-run quantity of output supplied by firms will exceed the natural level of output when the actual price level ———-that people expected.arrow_forwardDescribe the change in aggregate supply that should result from each of the following changes in determinants. Assume that nothing else is changing besides the identified change. (In your answer, indicate whether the change will "Decrease" or "Increase" aggregate supply or have no effect.) (a) A rise in the average price of inputs; (b) An increase in worker productivity; (c) Government antipollution regulations become stricter; (d) A new subsidy program is enacted for new business investment in productive equipment; (e) Energy prices decline.arrow_forward
- Determinants of aggregate supply The following graph shows an increase in short-run aggregate supply (AS) in a hypothetical economy where the currency is the dollar. Specifically, the short-run aggregate supply curve shifts to the right from AS1AS1 to AS2AS2, causing the quantity of output supplied at a price level of 100 to rise from $200 billion to $250 billion. The following table lists several determinants of short-run aggregate supply. Complete the table by selecting the changes in each scenario necessary to increase short-run aggregate supply. Change Necessary to Increase AS Technology (DECLINES or IMPROVES) Human capital (IMPROVES or DECLINES) Inflation expectations (HIGHER or LOWER)arrow_forwardAs you know, supply and demand shifts are caused by one of their determinants. Shifts in aggregate demand (AD) show the effect of events on price level and Real GDP. Any event that causes a change in consumer, business, or government spending or any change in net exports (C+l+G+Xn) will shift AD. Any event that causes a change in production costs or increases productivity will shift aggregate supply (AS). Decide if the following events are Micro, shifting supply or demand, or Macro, shifting AD or AS. Give the direction in which the graph shifts. Demand Situation Aggregate Supply Aggregate Demand Supply Sales of Atlanta Braves gear grows with the success of the team. 1. The President and Congress pass a trillion dollar stimulus bill to provide aid during recession. 2. 3. Salmonella outbreak in peanut processing plants threatens lunches for school children. 4. Pomegranates are shown to be cancer fighting superfoods. Value of U.S. dollars declines, exports increase. 5. Global oil prices…arrow_forwardThe graphs illustrate an initial equilibrium for the economy. Suppose that the government increases spending. 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 real GDP (or aggregate output) in the short run and in the long run. Adjust the graph. explain the second image as well and which is right.arrow_forward
- In the long-run, aggregate supply is a horizontal line at the long-run price level people can afford. True False One reason for why the aggregate demand curve slopes down is the wealth effect, which means that a higher price level leads to lower real wealth and, thereby, reduces the level of consumption. True Falsearrow_forwardUse the following graph to answer the following questions. Line Y Price level (P) 100 80 B Line Z Line X2 Line X1 Real GDP (3) If point A occurs chronologically before point B, then this graph could represent a decrease in aggregate demand with a decrease in long-run and short-run aggregate supply. a decrease in aggregate demand with constant long-run and short-run aggregate supply. constant aggregate demand with a decline in long-run aggregate supply. an increase in aggregate demand with constant long-run and short-run aggregate supply. constant aggregate demand with a decline in short-run aggregate supply.arrow_forward6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy deviates from the expected price level. Several theories explain how this might happen. For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 110. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will , and firms that rely on catalogs will respond by the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected…arrow_forward
- are my answers correct?arrow_forwardThe following events shift either aggregate demand, aggregate supply, both or neither. Using a diagram, illustrate the effect of the events on the economy. In particular, explain the effect of each event on price level, real GDP and equilibrium in the economy. A) A recent business survey reported that business confidence has declined. B) Government cuts the rate of personal income tax after a pandemic caused an economic slowdown. C) A recent flooding in a small rural region destroyed the potato crop. D) A booming economy in a neighbouring country has drawn many working age people (and their families) to emigrate there in search of jobs and better life.arrow_forwardThe following events shift either aggregate demand, aggregate supply, both or neither. Using a diagram, illustrate the effect of the events on the economy. In particular, explain the effect of each event on price level, real GDP and equilibrium in the economy. A) A recent business survey reported that business confidence has declined. B) Government cuts the rate of personal income tax after a pandemic caused an economic slowdown. C) A recent flooding in a small rural region destroyed the potato crop.arrow_forward
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