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ECON1020: Semester 2, 2012
Topic 5, Tutorial 5: Week beginning Monday the 27th of August Hubbard et al. Chapter 8
Questions
Question 1
A) Referring to the following diagram, circle the correct answers in the paragraph below. Price Level (P)
Real GDP (Y)
LRAS1
AD1
AD2
SRAS1
SRAS2
P3
P2
P1
Y*
Y1
Y2
A
C
B
D

Beginning at Point A, consumer confidence in the economy increases, leading to an increase in consumer spending and causing the AD curve to shift rightward to AD2. If changes in aggregate demand didn't cause the price level to immediately change, production would increase by the entire amount of the change in AD, to (Y*/Y1/Y2) at Point (A/B/C/D). However, rightward shifts in AD do cause prices to immediately begin increasing, because while some prices are slow to change, others are very flexible. In the short run the economy settles at Point (A/B/C/D), with output of (Y*/Y1/Y2) and a price level of (P1/P2/P3). At this point, the price level is unexpectedly (lower/higher), which will cause workers to push for (higher/lower) wages, made easier by the now (higher/lower) unemployment. Firms will also push for (higher/lower) prices for their goods. As a result of both of these effects, the SRAS will shift (leftward/rightward), making the price level move (upwards/downwards) towards (P1/P2/P3). As the price level (rises/falls), the (level of aggregate demand/position of the AD curve) (rises/falls), because: a) the real value of household wealth (increases/decreases), causing consumption to (increase/decrease), and b) the nominal amount of money demanded to be borrowed (increases/decreases), which causes the interest rate to (rise/fall) and investment to (rise/fall), and c) prices of Australian goods (rise/fall) relative to the price of foreign goods, which causes net exports to (increase/decrease). This process continues until the economy settles at long-run equilibrium at Point (A/B/C/D), with production of (Y*/Y1/Y2) and a price...
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