Question

In: Economics

Draw an economy operating (SRAS=AD) below the full employment level of output. if the above economy...

Draw an economy operating (SRAS=AD) below the full employment level of output.

if the above economy is left alone from government intervention, describe the Long Run adjustment.

Long run adjustment:

please specify the effects of this adjustment on:

Nominal wage:

output:

Prices:

Draw an economy operating (SRAS=AD) beyond the full employment level of output.

if the above economy is left alone from government intervention, describe the Long Run adjustment.

Long run adjustment:

please specify the effects of this adjustment on:

Nominal wage:

output:

Prices:

Solutions

Expert Solution

In case one when an economy operating (SRAS=AD) below the full employment level of output the it has deflationary or recessionary gap.The diagram is as shown below, in this diagram Yf is full potential of economy in which cyclical unemployment exists as economy is producing less than its potential of Yf. AD1 has shifted to AD2 and real GDP Ye is less than potential GDP of Yf. The average price levels go down from Pf to Pe. As labor demand is less than supply due to recession ,wage rates will go down.

In case one when an economy operating (SRAS=AD) beyond the full employment level of output then it has inflationary gap.The diagram is as shown below, in this diagram Yf is full potential of economy in which, economy is producing more at Ye than its potential of Yf. AD1 has shifted to AD2 and real GDP Ye is more than potential GDP of Yf. The average price levels go up from Pf to PLe. As labor demand is more than supply due to recession ,wage rates will go up.


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