Supply and Demand and Aggregate Supply Curve.

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Entorno Económico de la Empresa
Tarea 5

1.The following events have occurred at times in the history of the United States: * A deep recession hits the world economy.
* The world oil price rises sharply.
* U.S. businesses expect future profits to fall.
a.Explain for each event whether it changes short-run aggregate supply, long-run aggregate supply, aggregate demand, or some combination of them. A deep recession in the world economy decreases aggregate demand. A sharp rise in oil prices decreases short-run aggregate supply. The expectation of lower future profits decreases investment and decreases aggregate demand. b.Explain the separate effects of each event on U.S. real GDP and the price level, starting from a position of long-run equilibrium. A deep recession in the world economy decreases aggregate demand, which decreases real GDP and lowers the price level. A sharp rise in oil prices decreases short-run aggregate supply, which decreases real GDP and raises the price level. The expectation of lower future profits decreases investment and decreases aggregate demand, which decreases real GDP and lowers the price level. c.Explain the combined effects of these events on U.S. real GDP and the price level, starting from a position of long-run equilibrium. The combined effect of a deep recession in the world economy, a sharp rise in oil prices, and the expectation of lower future profits decreases both aggregate demand and short-run aggregate supply, which decreases real GDP and the price level rises, falls, or remains the same. d.Describe what a classical macroeconomist, a Keynesian, and a monetarist would want to do in response to each of the above events. Classical and monetarist economists probably would recommend no policy action for all three of the events. If they suggested any policy at all, the policy would involve cutting taxes. A Keynesian economist likely would suggest several policies for all three events, such as the U.S. government should increase aggregate demand by increasing its expenditure on goods and services or by cutting taxes. The Keynesian economist also would suggest that the Fed should increase the quantity of money and lower interest rates.

Price level| Real GDP demanded| Real GDP supplied in the short run| | (billions of 2001 pounds)|
100| 1,150| 1,050|
110| 1,100| 1,100|
120| 1,050| 1,150|
130| 1,000| 1,200|
140| 950| 1,250|
150| 900| 1,300|
160| 850| 1,350|
2.In the United Kingdom, potential GDP is 1,050 billion pounds and the table shows the aggregate demand and short-run aggregate supply schedules. a.What is the short-run equilibrium real GDP and price level? The short-run equilibrium real GDP and price level are determined by the price level that sets the quantity of real GDP demanded equal to the quantity of real GDP supplied in the short run. From the table, the short-run equilibrium real GDP is £1,100 billion and the price level is 110. b.Does the United Kingdom have an inflationary gap or a recessionary gap and what is its magnitude? Equilibrium real GDP exceeds potential GDP, so the United Kingdom has an inflationary gap. The inflationary gap equals the difference between real GDP and potential GDP, which is £50 billion. 3.Initially, in Figure 10.2 the short-run aggregate supply curve is SAS0 and the aggregate demand curve is AD0. Some events change aggregate demand, and later, some other events change aggregate supply. a.What is the equilibrium after the change in aggregate demand? Point C. The new aggregate demand curve is AD1. The short-run aggregate supply curve is SAS0. These curves intersect at point C. b.What is the equilibrium after the change in aggregate supply? Point D. The new short-run aggregate supply curve is SAS1. The aggregate demand curve is now AD1. These curves intersect at point D. c.Describe two events that could have changed aggregate demand from AD0 to AD1. Aggregate...
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