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Chapter 10: Q. 5 (page 228)

Identify the combined shifts in long-run aggregate supply and aggregate demand that could explain the following simultaneous occurrences,

a. An increase in equilibrium real GDP and an increase in the equilibrium price level

b. A decrease in equilibrium real GDP with no change in the equilibrium price level

c. An increase in equilibrium real GDP with no change in the equilibrium price level

d. A decrease in equilibrium real GDP and a decrease in the equilibrium price level

Short Answer

Expert verified

a. Rightward shift of aggregate demand curve should be quite the rightward shift of long-run aggregate supply curve.

b. Long-run aggregate supply curve and aggregate demand curve shifts leftwards in equal proportion.

c. Long-run aggregate supply curve and aggregate demand curve shifts rightwards in equal proportion.

d. Leftward shift of aggregate demand curve should be over the leftward shift of long-run aggregate supply curve.

Step by step solution

01

Rightward Shift (a)

(a) Arise in equilibrium real GDP and a rise within the equilibriumindicator is attained when both long run aggregate supply curve and aggregate demand curve shifts rightwards.
However, rightward shift of aggregate demand curve should bequite the rightward shift of long-run aggregate supply curve.

02

Leftward Shift (b)

(b) A decrease in equilibrium real GDP with no changewithin the equilibriumindicant occurs when both long-run aggregate supply curve and aggregate demand curve shifts leftwards in equal proportion.

03

Rightward shift (c)

(c) Arise in equilibrium real GDP with no change within the equilibriumindicant occurs when both long-run aggregate supply curve and aggregate demand curve shifts rightwards in equal proportion.

04

Leftward Shift (d)

(d) A decrease in equilibrium real GDP and a decreasewithin the equilibriumprice index is attained when both long-run aggregate supply curve and aggregate demand curve shifts leftwards.
However, leftward shift of aggregate demand curve should beover the leftward shift of long-run aggregate supply curve.

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Most popular questions from this chapter

Explain how, if at all, each of the following events would affect equilibrium real GDP and the long run equilibrium price level.

a. A reduction in the quantity of money in circulation

b. An income tax rebate (the return of previously paid taxes) from the government to households, which they can apply only to purchases of goods and services

c. A technological improvement

d. A decrease in the value of the home currency in terms of the currencies of other nations

Suppose that the position of a nation's long-run aggregate supply curve has not changed, but its long-run equilibrium price level has increased. Which of the following factors might account for this event?

a. A rise in the value of the domestic currency relative to other world currencies

b. An increase in the quantity of money in circulation

c. An increase in the labor force participation rate

d. A decrease in taxes

e. A rise in real incomes of countries that are key trading partners of this nation

f. Increased long-run economic growth

Why might a return of the U.S. population growth rate to its prior level also tend to boost the growth of U.S. Long-run aggregate supply? (Hint: Recall that real GDP growth is generated by the contributions of growth in labour and capital and growth in productivity of these resources.)

Consider panel (a) of Figure 10-8. What type of variation in the position of the long-run aggregate supply curve could generate inflation-that is, an increase in the equilibrium price level? In a nation that generally experiences economic growth over the long run, would we anticipate that such a change in the position of the long-run aggregate supply curve could explain persistent inflation?

For each question, sั‰pose that the exonorm begins at the long-run equilibrium point Ain the diagram below. Identify which of the other points on the diagram-points B,C,D, or E-could represent a new long-run equilibrium after the described events take place and move the economy away from point A.

a. Significant productivity improvements occur, and the quantity of money in circulation increases.

b. No new capital investment takes place, and a fraction of the existing capital stock depreciates and becomes unusable. At the same time, the government imposes a large tax increase on the nation's households.

c. More efficient techniques for producing goods and services are adopted throughout the economy at the same time that the government reduces its spending on goods and services.
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