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School

Temple University**We aren't endorsed by this school

Course

ECON 101

Subject

Economics

Date

Dec 20, 2024

Pages

Uploaded by ProfDiscovery19008

3. AD/AS Graph Assume the economy of Andersonland is in a long-run equilibrium with full employment. In the short run, nominal wages are fixed. (a) Draw a correctly labeled graph of short-run aggregate supply, long-run aggregate supply, and aggregate demand. Show each of the following. (i) Equilibrium output, labeled Y, (i1) Equilibrium price level, labeled PL, (b) Assume that there is an increase in exports from Andersonland. On your graph in part (a), show the effect of higher exports on the equilibrium in the short run, labeling the new equilibrium output and price level Y, and PL,, respectively. (c) Based on your answer in part (b), what is the impact of higher exports on real wages in the short run? Explain. (d) As aresult of the increase in exports, export-oriented industries in Andersonland increase expenditures on new container ships and equipment. (1) What component of aggregate demand will change? (1) What is the impact on the long-run aggregate supply? Explain. 4. AD/AS Graph (Another One) - TRY YOUR BEST on PART D! Assume the economy of Artland is currently operating above full employment. (a) Draw a correctly labeled graph of the short-run aggregate supply, long-run aggregate supply, and aggregate demand curves, and show each of the following. (i) The current equilibrium real output and price level, labeled as Y, and PL,, respectively (i1) The full-employment output, labeled as Y (b) Assume the central bank and the government do not take any policy actions to close the output gap. (1) On your graph in part (a), show how the economy automatically adjusts in the long run and label the new equilibrium price level PL,. (i) Explain the cause of the adjustment shown in part (b)(i). (c) Alternatively, suppose the government wants to close the output gap using fiscal policy. (i) Identify a fiscal policy action the government could implement to close the output gap. (i1) How will the fiscal policy action identified in part (c)(i) affect the following? - The unemployment rate - The natural rate of unemployment (i11) In closing the output gap, will the automatic adjustment identified in part (b)(i) produce a higher, a lower, or the same price level compared to the fiscal policy identified in part (¢)(1) ? (d) Draw a correctly labeled graph of the market for loanable funds. Show the effect of the fiscal policy action identified in part (c)(i) on the equilibrium real interest rate. (e) Given the interest rate change identified in part (d), will the long-run aggregate supply curve shift to the right, shift to the left, or remain the same in the long run? Explain.