1.5 TRACE THROUGH THE SHORT-RUN, INTERMEDIATE, AND LONG-RUN EFFECTS OF AN INCREASE IN CONSUMER WEALTH. (REMEMBER...

1.5 TRACE THROUGH THE SHORT-RUN, INTERMEDIATE, AND LONG-RUN EFFECTS OF AN INCREASE IN CONSUMER WEALTH. (REMEMBER THERE ARE SEVERAL AD DETERMINANTS. BE ABLE TO DO THIS QUESTION FOR ANY OF THEM—THINGS LIKE CONSUMER OPTIMISM, CONSUMER PESSIMISM, DECREASES IN WEALTH, DECREASE IN HOUSEHOLD INDEBTEDNESS, INCREASE IN HOUSEHOLD TAXES, DECREASES IN HOUSEHOLD TAXES, INCREASED EXCESS CAPACITY OF CAPITAL, DECREASED EXCESS CAPACITY OF CAPITAL, INCREASES IN THE COST OF MAINTAINING CAPITAL, DECREASES IN THE COST OF MAINTAINING CAPITAL, INCREASES IN GOV’T SPENDING, DECREASES IN GOV’T SPENDING, INCREASES IN INCOME ABROAD, DECREASED VALUE OF CURRENCY, ETC). USE MONETARY POLICY TO OFFSET THE RESULTING BUSINESS CYCLE. INCLUDE A GRAPH AND EXTENDED 4-STEP ANALYSIS.

1)start:

2)Shock:

3)Shift:

4)Result: Short Run

Intermediate

Long Run

Expert Solution

Higher consumer wealth will increase consumption demand, which will increase aggregate demand. AD curve will shift to right, increasing both price level and real GDP, giving rise to inflationary (expansionary) gap in short run. Unemployment rate will fall.

In the intermediate run, higher price level will increase wages and input prices, raising production costs. Firms will decrease production and output, decreasing aggregate supply. SRAS shifts leftward, until new long run equilibrium is established at intersection of new AD curve at further higher price level but restoring real GDP to potential GDP. Unemployment rate will restore at original full-employment rate.

In following graph, initial long-run equilibrium is at point A where AD0 (aggregate demand), LRAS0 (long-run aggregate supply) and SRAS0 (short-run aggregate supply) curves intersect with long-run equilibrium price level P0 and long-run equilibrium real GDP (which is equal to potential GDP) Y0. As result of higher consumption, AD curve will shift rightward from AD0 to AD1, intersecting SRAS0 at point B with higher price level P1 and higher real output Y1, with short run inflationary gap of (Y0 - Y1). In the long run, SRAS0 shifts left to SRAS1, intersecting AD1 at point C with further higher price level P2 and restoring real GDP to potential GDP level Y0.

Rahul Sunny answered 7 months ago

Trace through the short-run, intermediate, and long-run effects of an increase in consumer wealth. (Remember there are...

Trace through the short-run, intermediate, and long-run effects of an increase in consumer wealth. (Remember there are several AD determinants. Be able to do this question for any of them—things like consumer optimism, consumer pessimism, decreases in wealth, decrease in household indebtedness, increase in household taxes, decreases in household taxes, increased excess capacity of capital, decreased excess capacity of capital, increases in the cost of maintaining capital, decreases in the cost of maintaining capital, increases in gov’t spending, decreases in gov’t spending,...

Show the short run effects of an increase in consumer confidence on an open economy that...

Show the short run effects of an increase in consumer confidence on an open economy that is on a flexible exchange rate. (Hint: an increase in consumer confidence will increase autonomous consumption spending). To answer this question, draw the following five diagrams: 1. The goods market 2. The money market 3. The IS-LM curves 4. The interest parity condition 5. The AS-AD curves Label the initial and new equilibrium points on each diagram. Provide brief explanations for the changes

The stock market declines sharply, reducing consumers’ wealth. What are the short-run and long-run effects on...

The stock market declines sharply, reducing consumers’ wealth. What are the short-run and long-run effects on output and the price level? a. In the short-run, output increases and the price level decreases. In the long-run, output returns to its original level while the price level is lower than it was initially b. In the short-run, both output and the price level decrease. In the long-run, output returns to its original level while the price level is lower than it was...

25. Draw a graph showing the short- and long-run effects of an increase in the money...

25. Draw a graph showing the short- and long-run effects of an increase in the money supply.

What are short-run and the long-run effects of migration in the receiving country?

For each of the following events, discuss the short run and the long run effects on...

For each of the following events, discuss the short run and the long run effects on output and price levels, assuming that the policymakers take no action A) The stock market decreases sharply, reduce customer's wealth B) The federal goverment increases spending on national defense C) A technogical improvement raises productivity

What are short-run and long-run effects of migration in the sending countries?

Analyze the short run and long run effects of an unanticipated decrease in the money supply...

Analyze the short run and long run effects of an unanticipated decrease in the money supply in the misperceptions model. Tell me what happens to output, the actual price level and expected price level in both the short run and long run.

Explain the short run and long run effects of debts and deficits based on i) the...

Explain the short run and long run effects of debts and deficits based on i) the standard view and ii) the Ricardian view. Explain the conditions under which the latter view holds.

) For each of the following events, explain the short-run and long-run effects on output and...

) For each of the following events, explain the short-run and long-run effects on output and the price level, assuming policymakers take no action. The stock market declines sharply, reducing consumers’ wealth. The federal government increases spending on national defense. A technological improvement raises productivity. A recession overseas causes foreigners to buy fewer U.S. goods.

Question