Question

In: Economics

Suppose the economy is initially in long-run equilibrium and there is a positive demand shock. Using...

Suppose the economy is initially in long-run equilibrium and there is a positive demand shock. Using the AD-AS diagram clearly describe the effects of the demand shock in the short run and how the economy will adjust through the self-correcting mechanism in the long run

Solutions

Expert Solution


Related Solutions

Suppose the economy is operating in long-run equilibrium and a positive demand shock hits. We expect...
Suppose the economy is operating in long-run equilibrium and a positive demand shock hits. We expect a short-run increase in real GDP and the price level and a long-run _____ in real GDP (in comparison to the then short run GDP) and _____ the price level (in comparison to the then short run price level). increase; decrease decrease; increase increase; increase decrease; decrease Changes in aggregate demand can be caused by changes in: business costs. raw materials costs. the expenses...
Suppose the economy is initially in long-run equilibrium and experiences a favourable inflation shock. a) Explain...
Suppose the economy is initially in long-run equilibrium and experiences a favourable inflation shock. a) Explain how the SRAS line is affected in the short-run. b) Use your result for part (a) along with the AD-AS diagram to illustrate and explain what will happen to output and inflation in both the short-run and the long-run if the Reserve Bank accommodates the favourable inflation shock. c) Use your result for part (a) along with the AD-AS diagram to illustrate and explain...
Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose...
Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose politicians believe that the current level of output is too low and encourage the central bank to engage in expansionary monetary policy. a. (4 points) Discuss two ways in which the Central Bank can try to increase the money supply. Be explicit. b. (6 points) What are the effects of the expansionary policy in the short run? Show in the appropriate graph(s). c. (5...
Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose...
Suppose that the economy is initially in long-run equilibrium as depicted in the AD-AS model. Suppose politicians believe that the current level of output is too low and encourage the central bank to engage in expansionary monetary policy. a. (4 points) Discuss two ways in which the Central Bank can try to increase the money supply. Be explicit. b. (6 points) What are the effects of the expansionary policy in the short run? Show in the appropriate graph(s). c. (5...
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...
England in 1997. Suppose the economy of England is initially in a long run equilibrium. Draw...
England in 1997. Suppose the economy of England is initially in a long run equilibrium. Draw a Keynesian Cross (AE/AP). AD/AS diagram, IS/LM diagram, and Money Market diagram for England. Label Everything
53.) Assume that the economy is initially in a long-run equilibrium. Now suppose that businesses and...
53.) Assume that the economy is initially in a long-run equilibrium. Now suppose that businesses and households become more pessimistic about the future and decide to invest less in new structures, tools, and equipment, and also decide to engage in less consumption spending, at the current price level. a.) What will happen to output and the price level in the short run? Output will (rise, fall, stay the same) and the price level will (rise, fall, stay the same). (2...
Question 1: The AD-AS Model Suppose the economy is initially in long-run equilibrium, and there is...
Question 1: The AD-AS Model Suppose the economy is initially in long-run equilibrium, and there is a positive demand shock. a. Describe the short-run effects of this positive demand shock on output, unemployment, and prices. b. Describe how the economy will automatically move back to the potential level of output in the long run. c. Illustrate your answers in point (a) and (b) using an AD-AS graph. Show the short-run effects and the long-run adjustments.
Suppose the economy is initially in the long-run equilibrium, but a drop in consumer confidence causes...
Suppose the economy is initially in the long-run equilibrium, but a drop in consumer confidence causes the AD curve to shift to the left. What will be the impact on prices and output in the short run and long run? Select the correct answer below: In the short run, and long run, both prices and output will fall. In the short run, prices will fall, but output will stay the same. In the long run, both prices and output fall....
Suppose the economy is initially at a long-run equilibrium. Then the central bank increases the money...
Suppose the economy is initially at a long-run equilibrium. Then the central bank increases the money supply. Assuming any resulting inflation is unexpected, explain any changes in GDP, unemployment, and inflation in the short-run that are caused by the monetary expansion. Explain your conclusions using three diagrams: (i) one for the IS-LM model, (ii) one for the AD-AS model, and (iii) one for the Phillips curve.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT