Question

Velocity is 5 Money supply is 120 Current price level is 6 Full employment level of output is 100 1a. Illustrate graphically the aggregate demand curve, the short run aggregate supply curve, and the long run aggregate supply curve. 1b. What is the long run aggregate price Level?

Answer #1

(1a) As per Classical quantity theory equation,

Money supply (M) x Velocity (V) = Price level (P) x Output (Y)

When economy is operating at full-employment level,

Long-run aggregate price level (P) = (M x V) / Y

= (120 x 5) / 100

= 6

Since Long-run aggregate price level is equal to Current price level (= 6), economy is currently in long run equilibrium. The aggregate demand (AD), long run aggregate supply (LRAS) and short run aggregate supply (SRAS) curves are depicted below, with long run equilibrium being at point A where AD, LRAS & SRAS intersect at real GDP (equal to Full employment or potential GDP) level of Y0 (= 100) and aggregate price level equal to P0 (= 6).

(1b) Long-run aggregate price level = 6

Velocity is 5
Money supply is 120
Current price level is 6
Full employment level of output is 100
Illustrate graphically the aggregate demand curve, the short run
aggregate supply curve, and the long run aggregate supply
curve.Illustrate graphically the aggregate demand curve, the short
run aggregate supply curve, and the long run aggregate supply curve
and what is the long run aggregate price level?

a. If the money supply is $800 and velocity is constant at 2.5,
what is the aggregate demand curve (function)?
b. If the long-run aggregate supply is y=400 what will the
(long-run) equilibrium price level be?
c. If the money supply decreases to $600 what will happen to
output and the price level in the long run? Show this on a
graph.

1A.
Graphically illustrate and carefully explain the impact of a
general expectation of rapid inflation on the economy’s equilibrium
price and real output in the short-run, assuming that the price
level is flexible both upward and downward.
1B.
Graphically
illustrate and explain the impact of a decrease in aggregate demand
on the economy’s equilibrium price and real output, assuming that
the economy is currently operating at its full-employment output
level and the price
level is flexible upward
but not downward....

Price Level Aggregate Demand Short-Run Aggregate Supply 120
8,250 9,700 115 8,300 9,750 110 8,400 9,700 105 8,500 9,600 100
8,600 9,500 95 8,700 9,300 90 8,800 8,800 85 8,900 8,000 80 9,100
7,000
Return to the original values of aggregate demand and short-run
aggregate supply. Assume potential GDP decreases to 7,000. Graph
the aggregate demand curve, short-run aggregate supply, and the new
potential GDP. Be sure to describe where the economy is operating
in the short-run relative to where...

Suppose real output is initially at its full employment level.
Using Aggregate Demand (AD)—Aggregate Supply (AS) framework,
discuss the short-run and long-run effects of a decrease in
government expenditure on the price level, real output, nominal
wage rate and real wage rate under the following three alternative
assumptions: i) nominal wages are fully flexible, ii) nominal wages
are relatively slow to adjust, and iii) nominal wages are
completely rigid.
Thanks.

-Assume that the economy is initially in equilibrium at full
employment. Suppose that the Fed decreases money supply by 5
percent.
(a) Using an aggregate demand and supply graph (discussed in
Chapter 22), explain exactly what happens and why to aggregate
output (real GDP) and the inflation rate in the short run.
(b) Using the same aggregate demand and supply graph, explain
exactly what happens and why to aggregate output (real GDP) and the
inflation rate in the long run.

Assume that the economy is initially in equilibrium at full
employment. Suppose that the fed decreases money supply by 5
percent.
Using an aggregate demand and supply graph ( discussed in
chapter 22 ), explain exactly what happens and why to aggregate
output (real GDP) and the inflation rate in the short run.
(b) Using the same aggregate demand and supply graph, explain
exactly what happens and why to aggregate output (real GDP) and the
inflation rate rate in the...

The full-employment level of employment is: A. the equilibrium
level of employment reached after all wages and prices have fully
adjusted. B. the level of employment when aggregate demand is equal
to short-run aggregate supply. C. the level of employment where
there is no structural or frictional unemployment.

CHAPTER 9 MACRO (20 ECON)
Aggregate Price Level
Output (short-run aggregate supply)
Output (aggregate demand)
150
1000
200 + 200 = 400
125
800
400 + 200 = 600
100
600
600 + 200 = 800
75
400
800 + 200 = 1000
50
200
1000 + 200 = 1200
D. Short-run aggregate supply needs to decrease by __ at every
price in order for the economy to return to long-run equilibrium at
an output of 600. The aggregate price...

Suppose the Fed reduces the money supply by 5 percent. Assume
the velocity of money is
constant.
(a) What happens to the level of output and the price level in the
short run and in the long
run?
(b) In light of your answer to part (a), what happens to
unemployment in the short run and
in the long run according to Okuns law? Show your work
(d) In what direction does the real interest rate move in the
short...

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