Regate Demand-Aggregate Supply (AD-AS) Model (a) An economy...

regate Demand-Aggregate Supply (AD-AS) Model (a) An economy is currently operating in long-run equilibrium. Draw a graph of its short-run aggregate supply, aggregate demand, and long-run aggregate supply. Label the equilibrium price level and the full- employment output $Y_F$. (b) If the natural rate of unemployment in this economy is 4 percent and the frictional unemployment rate is 3 percent, what must be the structural unemployment rate? (c) Draw a new graph that shows an economy operating with an inflationary gap. Include the SRAS, AD, and LRAS. Label the equilibrium price level, real output level, and full employment output $Y_F$. (d) The economy from part (c) is in short-run equilibrium. If the aggregate quantity of output demanded in this economy is $3 trillion, what must the aggregate quantity of output supplied? (e) Is the long-run aggregate supply for this economy below, equal to, or above $3 trillion? Explain. Download

Transcript

00:02 Okay, question three is very long, so we just deal with it step by step.

00:12 Question a, use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium of this long -run equilibrium in the market.

00:22 So we just draw this short run, aggregate supply curve is upward sloping and aggregate demand curve is downward sloping.

00:33 And we know that the long run aggregate supply is always vertical.

00:38 So i just draw a vertical, i'm sorry, a vertical line here which crosses the intersection of these two lines.

00:47 So this is long run aggregate supply.

00:55 So we always have to have this graph in mind and the y -axis is p, price level, and x axis is q, which is the output of quantity.

01:05 The quantity output.

01:08 All right, so we call the initial equilibrium point a.

01:17 So now we can move on to answer question b.

01:20 Question b is saying that the central bank raises the money supply by 5%.

01:26 So we know that like the central bank is giving out money to everyone because we have more money supply rate.

01:36 So now everyone in economy is feeling like feeling like feeling richer than before.

01:41 So they might take their extra money to go shopping or to go like go on a vacation.

01:48 So we have this short run aggregate demand curve shift to the right.

01:53 So the short run new equilibrium is going to be this dot, call this b.

02:02 Okay question c.

02:04 Now show the new longline equilibrium called it c.

02:09 So in a long run what would happen? first of all from point a to point b, what we have is a rise of price level.

02:19 So everyone, so everything in the market is getting more and more expensive.

02:24 And in the short run, the quantity of output is increasing as well.

02:30 But in the long run, since everything is more expensive, workers themselves will ask for a higher wage so that they can maintain their living standard, right? so they will go to the company and ask their boss to pay them more.

02:49 So from the standpoint of a firm owner, they think that it is costly to hire that much workers right now.

02:56 So they will just fire some of them.

02:59 So if they are fire workers, they can produce fewer goods.

03:05 So the aggregate supply curve is going to shift to the left.

03:10 That is because the wage goes up as the price level goes up...

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