Question

All answers should have the AD OR AS or BOTH in them. The economic begins in...

All answers should have the AD OR AS or BOTH in them.

The economic begins in long-run equilibrium. Then one day, the president appoints a new chair of the Federal Reserve. This new chairman is well known for his view that inflation is not a major problem for an economy.

a. How would this news affect the price level that people would expect to prevail?

b. How would this change in the expected price level affect the nominal wage that workers and firms agree to in their new labor contracts?

c. How would this change in the nominal wage affect the profitability of producing goods and services at any given price level?

d. How does this change in profitability affect the short0run aggregate-supply curve?

e. If aggregate demand is held constant, how does this shift in the aggregate supply curve affect the price level and the quantity of output produced?

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Answer #1

a) new chairman is well known for his view that inflation is not a major problem for an economy so the people will start consuming more and aggregate demand will increase which rises the interest rate and further lead to higher expected price levels, the expected price level would rise

B) An increase in the price level is matched by an increase in the nominal wage, nominal wages in labor contracts would rise

C) cost of production will rise because of the high nominal wages to labor so profitability is reduced

D) since there is high cost of production the aggregate supply curve will shift to the left

E) when AD is constant and AS well shift to the left, th price level will rise and output will fall.

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