Question

Suppose that the President gets legislation passed that encourages investment in research and development of new technologies. Assuming this policy results in positive technological change for the U.S. economy, what does aggregate demand and supply analysis predict in terms of inflation and output? Please be specific and detailed in your response.

In your answer, please include the following:

What is the aggregate demand curve and why does it slope downward?

What relationship does the aggregate supply curve describe? How is this relationship depicted in the short-run and long-run?

How does the condition for short run equilibrium differ from the long run equilibrium?

Answer 1

Answer;

If there is legislation which President brings for investment in research and development, then if the investments prove to be technology efficient, there will be decline in cost of production. Owing to decline in cost of production, due to competitive price, the supply curve will be shifted downward. This will increase more output and employment. The equilibrium price will come down. As a result inflation will come down because with more output, and demand remaining constant, the price will fall.

1)In macroeconomics, aggregate demand (AD) is the cumulative demand for final goods and services at a given time. It specifies the amounts of goods and services which will be bought at all possible price levels. It slopes downward because it has to follow the lawa of damand in economics which states that among other things being equal or unchanged, the demand of goods and services is inversely proportional to its price. Hence, if the price of goods and services is high, people will demand less of the goods and services. As the price of goods and services will fall, there woujd be more demand of the goods and services. Thus, the aggregate demand curve slopes downward towards right.

2)As usual the supply curve of the goods and servicrs slope upward. It means, the supplier wants to supply more when the price of goods and services rise. Short run consideration comes when the cost function of the goods and services undergoe changes. It the supplier adopts the cost efficient technology, then, final cost of goods and services wi go down. In this case, the supply curve comes down the original supply curve. In the long run all factors that affect the supply line come under operation.The long term picture gives the generalized equilibrium position where price and otput are in equilibrium.

3)As discussed above, short term changes have temporary changes or changes due to monopolist exercising power in fixation of price or output. But this is not sustainable as other factors like competitors participation, government intervention or gradual changes in aggregare demand schedule constantly affect the demand and supply curve. Thus, the long term equilibrium may not be similar to short term equilibrium.