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Ay201 Learning Journal

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1104 - AY2018-T3 Learning Journal Unit 3 Reflect on the major topics of this unit and answer any three of the problems at the end of chapter seven in the text book. Be sure to consider alternative perspectives as you answer the problems. 3. Use the model of aggregate demand and short-run aggregate supply to explain how each of the following would affect real GDP and the price level in the short run. a. An increase in government purchases Shifts the AD curves to the right causing an increase in real income and the price level in the short-run. b. A reduction in nominal wages Shifts the SAS curve downward, causing an increase in real income and a lower price level. c. A major improvement in technology Shifts the SAS curve downward and the LAS curve outward, resulting in higher real income and a lower price level. d. A reduction in net exports Shifts the AD curve to the left, lowering real income and the price level. 7. Suppose the economy has a recessionary gap. We know that if we do nothing, the economy will close the gap on its own. Alternatively, we could arrange for an increase in aggregate demand (say, by increasing government spending) to close the gap. How would your views about the degree of price stickiness in the economy influence your views on whether such a policy would be desirable? …show more content…

The lower real wage increases the quantity of labour demand, and employment and output until the labour market “clears” at the natural rate of employment and output. Discretionary policy would shift the AD curve to the right, increasing the price level until the real wage lowers to “clear” the labor market at its natural rate. If wages are rigid, discretionary policy is necessary to avoid a long recession period in the labour market. Eventually, the price level might fall enough to lower real wages to “clear” the labour

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