Solow, Ad, and Sras Growth Curves Dealing with Monetary and Fiscal Policy
1. What is the Solow (or long-run) growth curve, why is it vertical, and what causes it to shift?
Solow growth curve is a production function that expresses the relationship between output and the factors of production. the formula is Y = F(A,K,eL) where A= ideas, K = physical captial, L = Labor, and e = natural resources.
The Solow growth curve is represented by a vertical line at the Solow growth rate because:
I. it does not depend on the rate of inflation.
II. there is an underlying assumption of strong money neutrality.
Negative shockto left(drought)
Positive shockto right(price drops)
2. What is the aggregate demand (AD) curve, why does it slope downward, and what causes it to shift? shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth
-wealth effect, interest rate effect, net export effect
A decrease in c (inward SR)
Increase in MS (right)
Collapse in housing mkt (left)
3. What is a long-run equilibrium and what does it imply about the economy?
Long Run Equilibrium
The long run equilibrium occurs where aggregate supply equals aggregate demand.
The primary difference in short run and long run analysis is that in the short run, capital is fixed and firms cannot enter or exit the market. Change in production can only occur by changing the amount of labor employed.
In the long run, both capital and labor are variable, and firms are free to exit and enter.
The long run is associated with the long-run average cost (LRAC) curve in microeconomic models along which a firm would minimize its average cost (cost per unit) for each respective long-run quantity of output.
In the short run, a profit-maximizing firm will increase production if marginal cost is less than marginal revenue and decrease production if marginal cost is greater than marginal revenue. 4. What are the implications of demand and real shocks in the two-curve model (with only the Solow growth curve and
Solow growth curve is a production function that expresses the relationship between output and the factors of production. the formula is Y = F(A,K,eL) where A= ideas, K = physical captial, L = Labor, and e = natural resources.
The Solow growth curve is represented by a vertical line at the Solow growth rate because:
I. it does not depend on the rate of inflation.
II. there is an underlying assumption of strong money neutrality.
Negative shockto left(drought)
Positive shockto right(price drops)
2. What is the aggregate demand (AD) curve, why does it slope downward, and what causes it to shift? shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth
-wealth effect, interest rate effect, net export effect
A decrease in c (inward SR)
Increase in MS (right)
Collapse in housing mkt (left)
3. What is a long-run equilibrium and what does it imply about the economy?
Long Run Equilibrium
The long run equilibrium occurs where aggregate supply equals aggregate demand.
The primary difference in short run and long run analysis is that in the short run, capital is fixed and firms cannot enter or exit the market. Change in production can only occur by changing the amount of labor employed.
In the long run, both capital and labor are variable, and firms are free to exit and enter.
The long run is associated with the long-run average cost (LRAC) curve in microeconomic models along which a firm would minimize its average cost (cost per unit) for each respective long-run quantity of output.
In the short run, a profit-maximizing firm will increase production if marginal cost is less than marginal revenue and decrease production if marginal cost is greater than marginal revenue. 4. What are the implications of demand and real shocks in the two-curve model (with only the Solow growth curve and