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Chapter 18: Q3. (page 389)

Suppose that an economy begins in long-run equilibrium before the price level and real GDP both decline simultaneously. If those changes were caused by only one curve shifting, then those changes are best explained as the result of:

a. the AD curve shifting right.

b. the AS curve shifting right.

c. the AD curve shifting left.

d. the AS curve shifting left.

Short Answer

Expert verified

The correct option is (c): the AD curve shifting left.

Step by step solution

01

The explanation for correct option (c)

In the AD-AS model, the long-run equilibrium is obtained when the short-run aggregate supply curve, aggregate demand curve, and long-run aggregate supply curves intersect.A shift in the aggregate demand curve causes price and GDP levels to change in the same direction. A short-run aggregate supply curve shift causes price and GDP levels to change in the opposite direction.

So, if an economy begins from long-run equilibrium, then the decline in price and output levels can be caused by a leftward shift of the aggregate demand curve.

Hence, the correct option is (c).

02

The explanation for correct options (a), (b), and (d) 

If the aggregate demand curve shifts rightward, there will be a rise in price and output levels.

So, option (a) is incorrect.

If the aggregate supply curve shifts rightward, there will be a rise in output level and a decline in the price level. So, option (b) is incorrect.

If the aggregate supply curve shifts leftward, there will be a fall in output and a price level rise. So, option (d) is incorrect.

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Most popular questions from this chapter

Why might one person work more, earn more, and pay more income tax when his or her tax rate is cut, while another person will work less, earn less, and pay less income tax under the same circumstance?

Suppose that over a 30-year period Buskerville’s price level increased from 72 to 138, while its real GDP rose from \(1.2 trillion to \)2.1 trillion. Did economic growth occur in Buskerville? If so, by what average yearly rate in percentage terms (rounded to one decimal place)? Did Buskerville experience inflation? If so, by what average yearly rate in percentage terms (rounded to one decimal place)? Which shifted rightward faster in Buskerville: its long-run aggregate supply curve (ASLR) or its aggregate demand curve (AD)?

Use the nearby figure to answer the following questions. Assume that the economy initially is operating at price level 120 and real output level $870. This output level is the economy’s potential (full-employment) level of output. Next, suppose that the price level rises from 120 to 130. By how much will real output increase in the short run? In the long run? Instead, now assume that the price level drops from 120 to 110. Assuming flexible product and resource prices, by how much will real output fall in the short run? In the long run? What is the long-run level of output at each of the three price levels shown?

Use graphical analysis to show how each of the following will affect the economy, first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output, that prices and wages are eventually flexible both upward and downward, and that there is no counteracting fiscal or monetary policy.

a. Because of a war abroad, the oil supply to the United States is disrupted, sending oil prices rocketing upward.

b. Construction spending on new homes rises dramatically, greatly increasing total U.S. investment spending.

c. Economic recession occurs abroad, significantly reducing foreign purchases of U.S. exports

Suppose the full-employment level of real output (Q) for a hypothetical economy is $250 and the price level (P) initially is 100. Use the short-run aggregate supply schedules below to answer the questions that follow:

AS(P100)
AS(P125)
AS(P75)
PQPQPQ
125280125250125310
100250100220100280
752207519075250

What is the level of real output in the short run if the price level unexpectedly rises from 100 to 125 because of an increase in aggregate demand? What happens if the price level unexpectedly falls from 100 to 75 because of a decrease in aggregate demand? Explain each situation, using numbers from the table.

b. What is the level of real output in the long run when the price level rises from 100 to 125? When it falls from 100 to 75? Explain each situation.

c. Illustrate the circumstances described in parts a and b on graph paper, and derive the long-run aggregate supply curve.
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