Question

2. The long-run aggregate supply curve 

Suppose the hypothetical economy of Curlyoria produces real GDP of $40 billion when unemployment is at its natural rate. Use the purple line (diamond symbols) to plot the economy's long-run aggregate supply (LRAS) curve in the following graph. Then place a black point (X symbol) on the point representing the equilibrium price and output level 

The long-run equilibrium level of output is determined by _______ ; Therefore it will _______  if the aggregate demand curve shifts to the right.

Suppose Curlyoria's equivalent of the Federal Reserve continually increases the growth rate of money in the economy. In the long run, continually increasing the growth rate of the money supply will change which of the following? Check all that apply. 

• The quantity of physical capital 

• The inflation rate 

• The price level 

• The size of the labor force

3. The short-run aggregate supply curve

The horizontal supply curve relies on which of the following assumptions? Check all that apply. 

• Firms that cannot adjust their prices in response to changes in demand experience surpluses and shortages. 

• Firms are willing to sell as much as customers are willing to buy at the fixed price. 

• Prices are fixed in the short run.

• The money supply is irrelevant in determining real variables.

Answer 1

The long run equilibrium level of output is determined by the minimum point of the long run average cost curve. Therefore the firms will earn supernormal profits if the aggregate demand curve shifts to the right.

If the Federal Reserve continually increased the money supply in the economy, then the inflation rate will continuously change in the economy. With more money supply in the economy the demand for goods in the economy will increase gradually. Thus the continuous supply of money in the economy will increase the price level of goods and services in the economy. Thus , the inflation rate will continuously change in the economy.

As said the price level will also continuously change in.the economy.

With the increase in the money supply, the economy will face an inflation, thus the labour supply will increase in the market. As with the increased prices of the goods and services more and more firms willl try to produce more goods as the profit they will earn now will increase due to increase prices. Thus, the labour supply in the market will increase.

3. The horizontal supply curve relies on the following assumptions:

1. Firms that cannot adjust to the prices in response changes to demand experiences surpluses and shortages. Here, a the firms cannot adjust to the price changes so the supply curve remains horizontal.

2. If the firms have fixed teh price irrespective the quantity sold. Firms are willing to sell as much as the customers are willing to buy at the fixed prices. In this case also the supply curve will be horizontal.

3. If the prices are fixed at the short run then also the supply curve will be horizontal.