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 3.2P
To determine
Identify the initial equilibrium, the short run equilibrium, and the long run equilibrium in different scenarios.
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The 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.
From the diagram, identify the initial equilibrium, short-run equilibrium, and the long-run equilibrium based on the three scenarios below. In each scenario, explain your answers and identify what happened to the price level and aggregate output.
Scenario 1. The economy initially in the long-run equilibrium at point A, and cost shock causes cost-pushed inflation. The government reacts by implementing expansionary fiscal policy. [Hint: Step 1: Explain how the cost shock causes disequilibrium and Step 2: What happened to the price level and aggregate output following the government intervention.]
Scenario 2. The economy initially in the long-run equilibrium at point A, and an increase in government purchases causes demand-pull inflation. In the long run, wages respond to the inflation.[Hint: Step 1: Explain how the government purchases causes disequilibrium through demand-pull inflation and Step 2: What happened to the price level and aggregate output when wages in the economy respond to…
Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate
demand curve (AD) and short-run aggregate supply curve (SRAS) for the economy. The long-run aggregate supply curve
(LRAS) is represented by a vertical line at $6 trillion. The economy is initially producing at potential output.
Suppose that fiscal authorities decide to increase marginal tax rates. Assume that this change in marginal tax rates is
perceived as a long-term change.
Shift the appropriate curves to illustrate the supply-side view of the fiscal policy effect on output and the price level.
PRICE LEVEL
120
100
80
40
20
0
0
LRAS
SRAS
AD
2
4
6
8
10
QUANTITY OF OUTPUT (Trillions of dollars)
12
AD
SRAS
LRAS
?
True or False: Supply-side economics is a long-run, growth-oriented strategy.
Chapter 27 Solutions
Principles of Economics (12th Edition)
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- Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand (AD) curve and short-run aggregate supply (AS) curve for the economy. The long-run aggregate supply curve is represented by a vertical line at the potential GDP level of $6 trillion. The economy is initially producing at potential GDP. Suppose that fiscal authorities decide to decrease marginal tax rates. Assume that this change in marginal tax rates is perceived as a long-term change. Shift the appropriate curves to illustrate the supply-side view of the fiscal policy effect on output and the price level. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. 120 Potential GDP AS 100 PRICE LEVEL 60 80 60 40 40 20 20 0 0 2 4 6 8 AD 10 12 QUANTITY OF OUTPUT (Trillions of dollars) AD 1 AS Potential GDP True or…arrow_forwardThe figure to the right shows an economy in an initial long-run equilibrium at point A a. Using the line drawing tool, show how, if at all, the equilibrium real GDP and the long-run equilibrium price level are affected by an income tax rebate (the return of previously paid taxes) from the government to households, which they can apply only to purchases of goods and services. Properly label this line. Carefully follow the instructions above, and only draw the required objects b. According to your graph, the equilibrium price level here to search O while the equilibrium real GDP ▼arrow_forwardFollowing an increase in consumer confidence, the US economy is experiencing a significant increase in aggregate spending. Using a correctly labeled aggregate demand and aggregate supply diagram, show how the change in aggregate spending will affect each of the following in the short run -Output -The price levelarrow_forward
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