Question

1. for the following question, complete each of the following tasks

a. draw a correctly labeled ad - as model in long - run equilibrium
i. label the equilibrium price level $pl_e$
ii. label the equilibrium output $y_f$
b. show the effect of the following scenario on the graph:
i. an increase in government spending
ii. label the new price level $pl_1$
iii. label the new out $y_1$

1. for the following question, complete each of the following tasks

a. draw a correctly labeled ad - as model in long - run equilibrium
i. label the equilibrium price level $pl_e$
ii. label the equilibrium output $y_f$
b. show the effect of the following scenario on the graph:
i. laborers demand and receive higher wages
ii. label the new price level $pl_1$
iii. label the new out $y_1$

1. country x is currently in long - run macroeconomic equilibrium. if the country’s economy experiences a significant decrease in the price of energy, a major input in production, what will occur in the short run?

Explanation:

Problem 3

Part a

Step1: Draw Axes

Draw a graph with the vertical axis labeled "Price Level (PL)" and the horizontal axis labeled "Real GDP (Y)".

Step2: Draw Curves

• Draw the Aggregate Demand (AD) curve as a downward - sloping line.
• Draw the Short - Run Aggregate Supply (SRAS) curve as an upward - sloping line.
• Draw the Long - Run Aggregate Supply (LRAS) curve as a vertical line at the potential output level \(Y_f\).

Step3: Label Equilibrium

The intersection of AD, SRAS, and LRAS is the long - run equilibrium. Label the equilibrium price level as \(PL_e\) and the equilibrium output (which is equal to \(Y_f\)) as \(Y_f\).

Part b

Step1: Analyze Government Spending Effect

An increase in government spending is an expansionary fiscal policy. It increases aggregate demand. So, the AD curve shifts to the right (from \(AD\) to \(AD_1\)).

Step2: Find New Equilibrium

The new intersection of the shifted \(AD_1\) curve with the SRAS curve gives the new short - run equilibrium. Label the new price level as \(PL_1\) (which is higher than \(PL_e\)) and the new output as \(Y_1\) (which is higher than \(Y_f\) in the short run).

Problem 4

Part a

Step1: Draw Axes

Draw a graph with the vertical axis labeled "Price Level (PL)" and the horizontal axis labeled "Real GDP (Y)".

Step2: Draw Curves

• Draw the Aggregate Demand (AD) curve as a downward - sloping line.
• Draw the Short - Run Aggregate Supply (SRAS) curve as an upward - sloping line.
• Draw the Long - Run Aggregate Supply (LRAS) curve as a vertical line at the potential output level \(Y_f\).

Step3: Label Equilibrium

The intersection of AD, SRAS, and LRAS is the long - run equilibrium. Label the equilibrium price level as \(PL_e\) and the equilibrium output (which is equal to \(Y_f\)) as \(Y_f\).

Part b

Step1: Analyze Wage Increase Effect

An increase in wages increases the cost of production for firms. This causes the short - run aggregate supply (SRAS) curve to shift to the left (from \(SRAS\) to \(SRAS_1\)).

Step2: Find New Equilibrium

The new intersection of the AD curve with the shifted \(SRAS_1\) curve gives the new short - run equilibrium. Label the new price level as \(PL_1\) (which is higher than \(PL_e\)) and the new output as \(Y_1\) (which is lower than \(Y_f\) in the short run).

Problem 5

1. Identify the Shock Type: A decrease in the price of energy (a major input in production) is a positive supply shock.
2. Effect on SRAS: A decrease in input prices (like energy) reduces the cost of production for firms. This leads to an increase in the short - run aggregate supply. So, the SRAS curve shifts to the right.
3. Short - Run Equilibrium: In the short run, the economy was initially in long - run equilibrium (AD, SRAS, and LRAS intersecting at \(Y_f\) and \(PL_e\)). After the SRAS shifts right, the new intersection of AD and the new SRAS (SRAS₁) will result in:

• A decrease in the price level (from \(PL_e\) to \(PL_1\)).
• An increase in the real output (from \(Y_f\) to \(Y_1\), where \(Y_1>Y_f\) in the short run).

Answer:

s:

Problem 3

a. (Graph with AD (downward - sloping), SRAS (upward - sloping), LRAS (vertical at \(Y_f\)), equilibrium at \(PL_e\) and \(Y_f\))
b. (AD shifts right, new equilibrium at \(PL_1\) (higher than \(PL_e\)) and \(Y_1\) (higher than \(Y_f\)))

Problem 4

a. (Graph with AD (downward - sloping), SRAS (upward - sloping), LRAS (vertical at \(Y_f\)), equilibrium at \(PL_e\) and \(Y_f\))
b. (SRAS shifts left, new equilibrium at \(PL_1\) (higher than \(PL_e\)) and \(Y_1\) (lower than \(Y_f\)))

Problem 5

In the short run, the price level will decrease, and the real output (real GDP) will increase. The short - run aggregate supply curve shifts to the right due to the lower energy prices, leading to a new short - run equilibrium with a lower price level and a higher level of real output than the initial long - run equilibrium output \(Y_f\).