Question

5. The slope and position of the long-run aggregate supply curve 

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. 

• The size of the labor force 

• The quantity of physical capital 

• The price level 

• The inflation rate 

  
  

Suppose the economy produces real GDP of $40 billion when unemployment is at its natural rate. 

Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph.

Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to _______ which will: 

Not affect the long-run aggregate supply curve 

Shift the long-run aggregate supply curve to the left 

Shift the long-run aggregate supply curve to the right 

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. 

Direction of LRAS Curve Shift 

• Many workers leave to pursue more lucrative careers in foreign economies. 

• For environmental and safety reasons, the government requires that the country's nuclear power plants be permanently shut down. 

• A natural disaster destroys a significant amount of the economy's production facilities.

Answer 1

The long-run aggregate supply curve gives the economy's potential output that it can produce using all its resources efficiently. This is also the output level associated with the natural rate of unemployment of the economy.

As the Fed doubles the quantity of money, given the economy's productivity, there will be too much money chasing too few goods. This will increase the general level of prices in the economy. As the price rate rises, inflation will also rise.

Therefore, the correct options are:

- The inflation rate

- The price level

The LRAS supply curve is the vertical straight line giving a potential output of the economy irrespective of the price level for that economy. This is depicted in the figure below:

If the government passes a law that decreases unemployment benefits, this will decrease the natural rate of unemployment for the economy. Therefore, the resources available at full employment will rise, and thus the output produce at full employment. Therefore, the LRAS curve will shift to the right.

The correct option is: fall.

Given the options:

- The LRAS curve will shift to the right as the natural rate of unemployment falls.

- The LRAS will shift to the right.

- The decrease in unemployment benefits decreases unemployment that occurs naturally. This increases potential output and shifts the curve to the right, not to the left.

Therefore, the correct option is: shift the LRAS curve to the right.

1. As more worker move to foreign economies, the resources within the economy decreases. This shifts the LRAS curve to the left.

2. The shutting down of industry increases unemployment and decreases output. Moreover, it causes the final product or GDP to reduce permanently. Hence the LRAS curve shift to the left.

3. The investment tax credit increases the firm's ability to buy more machines and equipment. This increases physical capital in the economy and directly affects productivity. This shifts the LRAS to the right.