Question

Assume that the economy of Fruitland is a long-run equilibrium with full employment. In the short...

Assume that the economy of Fruitland is a long-run equilibrium with full employment. In the short run, nominal wages are fixed.

(a) Assume that there is an increase in exports from Fruitland. Explain the effect of higher exports on the following in the short run:

            (i) Real GDP

(ii) Price Level

(b) Based on your answer in part (a), what is the impact of higher exports on real wages in the short run? Explain.


      (c) As a result of the increase in exports, export-oriented industries in Fruitland increase expenditures on new container ships and equipment.

(i) What component of aggregate demand will change?

(ii) What is the impact on the long-run aggregate supply? Explain.

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Homework Answers

Answer #1

A.

I.

Real GDP increases, with increase in AD due to the increase in exports. It makes AD to shift to the right.

II.

Price level increases, as AD shifts to the right with increase in exports.

==

B.

Due to higher exports, price level increases. It makes value of real wage to decrease in the short run, though nominal wage remains fixed.

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C.

I.

It is the investment spending, that is going to increase. So, investment component of aggregate demand is going to increase.

II.

LRAS will shift to the right, as the capacity in the economy increases. It makes potential output creation to increase. As a result, SRAS shift to the right.

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