Aa increase in coptal siting isle has decreased gross investment, moving the economy out of long run equabrium. The short fun eflect is shewn below, (1) a. How does the short-run equilibrium compare to the initial equilibrium? b. What is the primary concern of policy makers under these conditions? high inflation declining value of the dollar high unemployment c. What policy action might the government take in order to improve economic conditions? d. Use the graph above to depict the goal of the fiscal action discussed in part c. Instructions: Use the tool provided 'Fiscal Action' to show the result of the policy action taken by the government. Plot only the endpoints of the line ( 2 points total). Label your line appropriately. e. What is the desired final outcome after the fiscal policy action and multiplier effect have occurred? A price level (Click to select) \( \sim P^{*} \) and an output level (Click to select) \( \sim Y^{*} \)
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In the short-run equilibrium, the economy is likely to have lower output and higher unemployment compared to the initial equilibrium. This is because the decrease in gross investment means less capital is being put to productive use, which can lead to a decrease Show more…
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Draw a basic aggregate demand and aggregate supply graph (with LRAS constant) that shows the economy in long-run equilibrium. a. Assume that there is a large increase in demand for U.S. exports. Show the resulting short-run equilibrium on your graph. In this short-un equilibrium, is the unemployment rate likely to be higher or lower than it was before the increase in exports? Briefly explain. Explain how the economy adjusts back to long-run equilibrium. When the economy has adjusted back to long-run equilibrium, how have the values of each of the following changed relative to what they were before the increase in exports: i. Real GDP ii. The price level iii. The unemployment rate b. Assume that there is an unexpected increase in the price of oil. Show the resulting short-run equilibrium on your graph. Explain how the economy adjusts back to long run equilibrium. In this short-run equilibrium, is the unemployment rate likely to be higher or lower than it was before the unexpected increase in the price of oil? i. Real GDP ii. The price level iii. The unemployment rate
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Macroeconomic Equilibrium in the Long Run and the Short Run
Suppose an economy is in long-run equilibrium. a. Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium (call it point A). Be sure to include both short-run and long-run aggregate supply. b. The central bank raises the money supply by 5 percent. Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium (call it point B). c. Now show the new long-run equilibrium ( call it point C). What causes the economy to move from point B to point C? d. According to the sticky-wage theory of aggregate supply, how do nominal wages at point A compare to nominal wages at point B? How do nominal wages at point A compare to nominal wages at point C? e. According to the sticky-wage theory of aggregate supply, how do real wages at point A compare to real wages at point B? How do real wages at point A compare to real wages at point C? f. Judging by the impact of the money supply on nominal and real wages, is this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run?
As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices. a. Starting from a long-run equilibrium, illustrate the effects of these two changes using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram. On both diagrams, label the initial long-run equilibrium as point A and the resulting short-run equilibrium as point B. For each of the following variables, state whether it rises or falls or whether the impact is ambiguous: output, unemployment, the price level, the inflation rate. b. Suppose the Fed responds quickly to these shocks and adjusts monetary policy to keep unemployment and output at their natural rates. What action would it take? On the same set of graphs from part $a$, show the results. Label the new equilibrium as point C. c. Why might the Fed choose not to pursue the course of action described in part $b$?
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