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11 . The response of the self-regulating economy The economy of Langoria is currently in a...

11 . The response of the self-regulating economy The economy of Langoria is currently in a state of long-run equilibrium in which the economy is producing at its Natural Real GDP. The level of Real GDP is currently 6 trillion dollars, and the price level is 115. Changes in a Self-Regulating Economy 0 2 4 6 8 10 12 14 16 140 135 130 125 120 115 110 105 100 PRICE LEVEL REAL GDP (Trillions of dollars) AD 2 AD 1 SRAS LRAS Suppose there is a sudden increase in government purchases that causes a shift in aggregate demand from AD1 AD 1 to AD2 AD 2 . As a classical economist from Langoria, you explain that the shift in aggregate demand creates . You also explain that will be affected in the short run. You note that such a gap leads to an unemployment rate that is the natural unemployment rate. This means that wages are certain to . As wages change, the curve shifts to the until Real GDP equals Natural Real GDP. Finally, you explain that in the long run, will be affected.

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Answer #1

*The demand of aggregation has changed to the left.

*This has created and known as recessionary gap.

*In the short run both the price and the real GDP level will be affected.

* The Recessionary gap increases the

unemployment rate so that the unemployment.

* That the rate is greater than the natural rate ofunemployment. In such a condition wages are expected to fall.

* As wages change the short

run aggregate supply curve shifts to the right.

Until the GDP is now equal to the full

employment level. In the long run only price

level will be affected.

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