Chapter 45, Problem 1FRQ

a)

To determine

A graph that shows AD, LRAS, SRAS, equilibrium output, and aggregate price level while the economy is experiencing a recession.

Explanation of Solution

The following graph shows AD, LRAS, SRAS, equilibrium output, and aggregate price level while the economy is experiencing a recession.

  

In the graph, the horizontal axis represents the real GDP and the vertical axis shows the aggregate price level. Here, the aggregate demand curve slopes downward and the SRAS curve slopes upward where the long-run aggregate supply curve is a straight line to the vertical axis.

On the graph, the equilibrium is found at the point where the SRAS curve cuts the AD curve by labeling it E_1.

Economics Concept Introduction

Introduction: An economic downturn, or business cycle contraction, happens when this happens. Consumer spending declines sharply across the board, which is often when recessions begin.

b)

To determine

The effects of an increase in energy prices on equilibrium in the graph.

Explanation of Solution

The following graph represents the effects of an increase in energy prices on equilibrium:

  

Here, the equilibrium aggregate price level and aggregate output which is the real GDP are shown on the axis at this point. Moreover, the equilibrium is at the left side of the LRAS curve and the SRAS curve moves to the left side. The equilibrium aggregate price level and output are shown at the new equilibrium which is labeled by E₂ on axes where the aggregate price level is increased but the aggregate output or Real GDP is decreased.

Economics Concept Introduction

Introduction: An economic downturn, or business cycle contraction, happens when this happens. Consumer spending declines sharply across the board, which is often when recessions begin.

c)

To determine

The effect of an increase in energy on unemployment and inflation in the economy.

Explanation of Solution

The increase in energy prices increases the unemployment rate and also rises the aggregate price level which will cause inflation. It happens because when the equilibrium is below the potential GDP, as in the AD/AS framework, unemployment is relatively high, and when it is reasonably close to the potential GDP, it is relatively low. And, the increasing aggregate price levels are often a sign that firms need to increase production to keep up with rising total demand.

Economics Concept Introduction

Introduction: A global decentralized market for trading currencies is known as the foreign exchange market and for every currency, the foreign exchange rates are set by this market.

d)

To determine

Graph of foreign exchange market for U.S. dollars by showing the effect of increased U.S. energy prices on demand of U.S. dollars.

Explanation of Solution

The following graph of the foreign exchange market for U.S. dollars shows the effect of increased U.S. energy prices on demand for U.S. dollars.

  

In the graph, the horizontal axis shows the quantity of U.S. dollars and the vertical axis represents the exchange rate of Canadian dollars as per U.S. dollar.

The demand curve (D_USD) for U.S. dollars would slope downward and the supply curve (S_USD) for U.S. dollars would slope upward.

Here, according to the graph, the equilibrium exchange rate and quantity of U.S. dollars are visible at the points on axes where the demand and supply curves intersect. The demand for U.S. dollars would increase as a result and the inflation in country United States would cause a decrease in the demand for export to country U which needs to be purchased in dollars of U.

Economics Concept Introduction

Introduction: A global decentralized market for trading currencies is known as the foreign exchange market and for every currency, the foreign exchange rates are set by this market.