The economy is initially in long-run equilibrium. The import price of the raw materials it uses for production now falls due to a worldwide oversupply. In the short run:

the aggregate demand curve does not shift and the short-run aggregate supply curve shifts left.

the aggregate demand curve shifts left and the short-run aggregate supply curve does not shift.

the aggregate demand curve does not shift and the short-run aggregate supply curve shifts right.

the aggregate demand curve shifts right and the short-run aggregate supply curve does not shift.

the aggregate demand curves shifts left and the short-run aggregate supply curve shifts right.

Solutions

Expert Solution

● the aggregate demand curve does not shift and the short-run aggregate supply curve shifts right.

Reason- When the input prices falls, it now costs less to produce each unit of output. So production increases and supply rises. Short run Aggregate supply curve shifts to the right. Aggregate demand curve is not directly changed by changes in the input prices.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

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...

A country is initially at the long-run and short-run equilibrium. However, in the short-run, the country...

A country is initially at the long-run and short-run equilibrium. However, in the short-run, the country experiences a drop in the general price level and the real GDP at the same time due to a temporary shock and we know there is one shock only. (a) Which curve(s) in the LRAS-SRAS-AD diagram must have shifted to generate the observation above? If any of the curves has shifted, state the direction of the shift, propose a factor that leads to the...

A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand falls. By the...

A perfectly competitive market is initially in long-run competitive equilibrium. Then, market demand falls. By the time all adjustments have been made, price will be __________ its original level if the industry is a(n) __________ costs industry. a. above; decreasing b. at; constant c. at; increasing d. below; increasing e. a and d

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 the economy is in long-run equilibrium. In a short span of time, there is a...

Suppose the economy is in long-run equilibrium. In a short span of time, there is a sharp decline in the stock market, a tax cut, an increase in the money supply, and a decline in the value of the dollar. In the short run, what would we expect to happen?

Consider an economy that initially stays at its long-run equilibrium. Policy affects the economy with a...

Consider an economy that initially stays at its long-run equilibrium. Policy affects the economy with a one-period lag. Answer the following questions: Use the 3-equations model and diagrams to provide a period by period explanation of how a negative aggregate demand shock lead to a deflation trap, where output and inflation are falling without limit. How can the government use fiscal policy to escape the deflation trap? Illustrate with diagrams. Suppose that the current public debt is already quite large,...

2. Assume the economy is initially in a short-run equilibrium at a level of output below...

2. Assume the economy is initially in a short-run equilibrium at a level of output below the natural rate. a. Use the IS-LM model to graphically illustrate: i) how the economy will adjust in the long-run if the no-policy action is taken. ii) the long-run equilibrium if fiscal policy is used to return the economy to the natural rate of output. b. Explain how investment, the interest rate, and the price level differ in the new long-run equilibrium in the...

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

Consider an economy that is initially in long-run equilibrium. Unexpectedly, there is a sudden massive decrease...

Consider an economy that is initially in long-run equilibrium. Unexpectedly, there is a sudden massive decrease in house prices. a) Explain why this is likely to lead to a reduction in private consumption. Theoretically, could consumption also increase? Explain. (3 points) b) Show in the AS-AD diagram, and explain, the consequences of this decline in consumer spending. (3 points) c) If the central bank does not change its monetary policy rule, how will it react to the situation in (b)?...

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.

Subjects