375 Week 5 HomeworkChapter 7
2. What assumptions cause the immediate-short-run aggregate supply curve horizontal? Why is the long run aggregate supply curve vertical? Explain the shape of the short-run aggregate supply curve. Why is short-run curve relatively flat to the left of the full-employment output and relatively steep to the right? The long-run aggregate supply curve is vertical because the economy’s potential output is set by the availability and productivity of real resources instead of price. The availability and productivity of real resources is reflected by price inputs and in long run price inputs which includes wages which adjust to match changes in the price level. Companies find there is no reason to increase production to take advantage of higher prices if they are facing equally higher resource prices. The shape of the short-run supply curve is up sloping because wages and other input prices adjust slower than the price level. This leaves room for companies to take advantage of the higher prices by increasing output. Companies face increasing per unit production costs as they increase output which makes higher prices necessary to induce them to produce more. 3. Other things equal, what effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and the level of real output. a) A reduction in the economy’s real estate.
The aggregate demand will curve right with output and price being up. b) A major increase in federal spending for healthcare with no increase in taxes). Aggregate demand would curve right and output and price level would be up. c) The complete disintegration of OPSEC, causing oil process to fall by one half. Aggregate Supply would curve right and output would be up and the price level would be down. d) A 10 percent reduction in personal income tax rates (with no change in government spending). Aggregate...
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