Consider an economy at long-run macroeconomic equilibrium. Now, suppose that economy experiences 10% economic growth. a....

Consider an economy at long-run macroeconomic equilibrium. Now, suppose that economy experiences 10% economic growth.

a. Show the economic growth on a graph.

b. If aggregate demand increases by 15% over the same timeframe, show the effects on price level and real GDP on the same graph as part a.

c. List four factors that would cause the aggregate demand increase mentioned in part b.

Solutions

Expert Solution

a) The economic growth of a country can be explained either by production possibility frontier or by the long run aggregate supply curve. Upward shifting of both curves show the economic growth.

In the following figure the economic growth shows by the long run aggregate supply curve.

when the economy experience a growth to 10% then the long run aggregate supply curve shift to right wards. The long run aggregate supply curve LRAS is shifted to LRAS1. When the aggregate demand increase to 15% then the short run aggregate demand curve shift to rightwards or upwards. Here shift from SAD toSAD1. As a result the output of the economy increases from Y to Y1 and also the price increase from P to P1.

c) The increase in the government expenditure, increase in the net exports, increase in investment and increase in consumption expenditure are the four factors that lead to the increase in aggregate demand.

Rahul Sunny answered 4 weeks ago

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