Using diagrams and the short-run AD-AS model, show the three short-run equilibrium states of the economy...

Using diagrams and the short-run AD-AS model, show the three short-run equilibrium states of the economy and illustrate (i) a recessionary gap, (ii) an inflationary gap, and (iii) full employment equilibrium.

Solutions

Expert Solution

(i) a recessionary gap : This happens when there is a negative output gap where actual GDP is less than potential GDP. This implies that short run equilibrium occurs to the left of the long run equilibrium. This is shown below where AD and SRAS meet at an equilibrium which is to the left of long run equilibrium where LRAS and AD meet.

(ii) an inflationary gap : This happens when there is a positive output gap where actual GDP is greater than potential GDP. This implies that short run equilibrium occurs to the right of the long run equilibrium. This is shown below where AD and SRAS meet at an equilibrium which is to the right of long run equilibrium where LRAS and AD meet.

(iii) full employment equilibrium : This happens when actual GDP is s equal to potential GDP. This implies that short run equilibrium coincides the long run equilibrium. This is shown below where AD and SRAS meet at an equilibrium which coincides the long run equilibrium where LRAS and AD meet.

Rahul Sunny answered 3 months ago

Next > < Previous

Related Solutions

Using the AD-AS model, show and briefly explain the short and long-run effects on the economy...

Using the AD-AS model, show and briefly explain the short and long-run effects on the economy of a massive increase in government-sponsored infrastructure spending.?

In the AD/AS model, what must happen for the economy to be in short run equilibrium?...

In the AD/AS model, what must happen for the economy to be in short run equilibrium? How about long run equilibrium?

Using AD/AS model and diagrams, discuss the short-run and long-run impacts of the following events on...

Using AD/AS model and diagrams, discuss the short-run and long-run impacts of the following events on the price level and output of the domestic economy (starting from the full-employment level): a. A rise in oil prices. Based on your analysis, suggest a policy recommendation in (a). b. A decrease in tourism. Based on your analysis, suggest a policy recommendation in (b).

Using AD/AS model and diagrams, discuss the short-run and long-run impacts of the following events on...

Using AD/AS model and diagrams, discuss the short-run and long-run impacts of the following events on the price level and output of the domestic economy (starting from the full-employment level): a. An increase in money supply b. An increase in the demand for housing by foreigners

Using AD/AS model and diagrams, discuss the short-run and long-run impacts of the following events on...

Assume the economy is at full employment. Use the IS-LM/ AD-AS model to show the short-run...

Assume the economy is at full employment. Use the IS-LM/ AD-AS model to show the short-run and long-run impacts of a positive demand shock such as an increase in business confidence and investment spending on: the real interest rate (r), real GDP (Y), unemployment (U), consumption spending (C), the nominal money supply (M), the price level (P) and the real value of the money supply(M/P). You must present properly labeled (IS-LM and AD-AS diagrams to show the SR and LR...

Using GRAPHS and explanation, show the 3 states of the economy in the short run as...

Using GRAPHS and explanation, show the 3 states of the economy in the short run as compared to the natural rate of GDP.

1. Using the AS-AD model diagram, illustrate what happens to the LONG-RUN and SHORT-RUN equilibrium level...

1. Using the AS-AD model diagram, illustrate what happens to the LONG-RUN and SHORT-RUN equilibrium level of aggregate output and inflation, when the economy is hit by a negative (adverse) demand shock and there is NO POLICY response. Suppose the economy is at a long-run equilibrium before it is hit by the negative demand shock. Make sure you properly label all the axes and curves. Will the negative demand shock more likely lead to an expansion or recession in the...

Assume that the economy is initially at a short-run equilibrium where the AD intersects with the...

Assume that the economy is initially at a short-run equilibrium where the AD intersects with the short-run AS (SRAS). My year is 2017 and country is Brazil. To do this, you will first need an estimate for potential Real GDP (RGDP) and the inflation rate at the long-run equilibrium. Assume for simplicity that potential RGDP and long-run equilibrium inflation is equal to the average of the indicator from the last five years. These numbers for my year are: average GDP...

Suppose an economy is initially at long run equilibrium. Using LRAS, SRAS and AD graphs, show...

Suppose an economy is initially at long run equilibrium. Using LRAS, SRAS and AD graphs, show this initial point and label it as A. (a) Due to terrorist attacks, the consumption expenditure decreased by $150 billion. With an MPC of 0.5, illustrate this decline in consumption on the graph in (a) and also compute the impact of the decline in consumption on output level (Y). (b) If the government wants to use taxes to restore long run equilibrium, should the government...

Subjects