Question

1. Why does the short run aggregate supply (SRAS) curve slope upward to the right? What does the upward slope indicate?

2. If the prices of both (a) resources and (b) goods and services increase proportionally will business firms have a greater incentive to expand output? Why or why not?

3. If the price level in the current period is higher than what buyers and sellers anticipated, what will tend to happen to real wages and the level of employment? How will the profit margins of business firms be affected? How will the actual rate of unemployment compare with the natural rate of unemployment? Will the current rate of output be sustainable in the future?

4. Why is an unanticipated increase in the price level likely to expand output in the short run, but not in the long run?

5. if the inflation rate increases and the higher rate is sustained over an extended period of time, what will happen to the nominal interest rate? What will happen to the real interest rate?

6. “When the U.S. dollar appreciates against the Euro, fewer dollars will be required to purchase a Euro.” Is this true? If the dollar appreciates, how will this affect net exports?

7. Can output rates beyond the economy’s long run potential be achieved? Can they be sustained? Why or why not?

8. When the economy is in long-run equilibrium, which of the following will be true?

a. The actual price level will be equal to the price level anticipated by decision makers.

b. The actual unemployment rate will be equal to the natural rate of unemployment.

9. (a) What is the difference between the real interest rate and the money interest rate?

(b) Suppose that you purchased a $5,000 bond that pays 7% interest annually and matures in five years. If the inflation rate in recent years has been steady at 3% annually, what is the estimated real rate of interest? If the inflation rate during the next five years rises to 8%, what real rate of return will you earn?

10. How is a nation’s trade balance related to its net inflow of foreign capital? If the inflow of foreign capital is used to finance the federal deficit, how will the well-being of future generations be affected?

Answer 1

The short-run aggregate Supply curve is given by

where

Y= Production of the economy

Y'= Natural level of production of an economy

P= Price Level

Pe= Expected Price level from consumers

The short-run aggregate supply curve is upward sloping as it is the positive relation between the price level and the amount of goods economy will supply. It indicates that when the price rises the quantity supplied by the producers also increases (Law of Supply).

There are two important things to note about SRAS.

(1) It represents a short-run relationship between the price level and output supplied. Aggregate supply slopes up in the short-run because at least one price is constant ( ie capital).

(2) SRAS also tells us there is a short-run tradeoff between inflation and unemployment. Because higher inflation leads to more output, higher inflation is also associated with lower unemployment in the short run