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In the 1970s, the members of the Organization of the Petroleum Exporting Countries (OPEC) reduced their supply of oil to the world market, raising resource
In the 1970s, the members of the Organization of the Petroleum Exporting Countries (OPEC) reduced their supply of oil to the world market, raising resource prices for U.S. firms. This caused a situation known as "stagflation," which is characterized by high inflation combined with lowered aggregate output. The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves for the United States in 1973, Shift one of the curves on the following graph to illustrate the effect of the oil shocks of the 1970s on the U.S. economy. O AS AD AS PRICE LEVEL (CPD) AD REAL GDP (Billions of dollars)During World War I and World War II, the U.S. government spent large sums of money on the war effort. Following both of these periods, the United States experienced double-digit inflation. The following diagram shows the aggregate demand (41)) and aggregate supply (45) curves for the United States before the inflationary period. Shift one of the curves to illustrate the primary cause of the inflation described in the preceding paragraph. O AD AS AS PRICE LEVEL AD REAL GDP This kind of inflation is called inflation. Inflation of this type is accompanied by in aggregate output.9. The short-run and long-run aggregate supply curves The following graph represents the short-run aggregate supply curve (SR.AS) based on an expected price level of 120. The economy's full-employment output level is $9 trillion. Major unions across the country have recently negotiated three-year wage contracts with employers. The wage contracts are based on an expected price level of 120, but the actual price level turns out to be 160. Show the short-run effect of the unexpectedly high price level by dragging the curve or moving the point to the appropriate position. (?) 240 SRAS[120] SRAS[120] PRICE LEVEL (CPI) 20 80 9 12 15 15 REAL GDP (Trillions of dollars) Interpret the change you drew on the previous graph by filling in the blanks in the following paragraph: The higher-than-expected price level causes firms to earn profit than they expected on each unit of output they produce, and, therefore, they their production level. At the same time, the real value of wages and other resource prices is than workers and firms expected when they signed long-term contracts. As a result, the economy as a whole produces at a level its full-employment output, and the unemployment rate is than its natural rate. Now, suppose prices remain higher than expected. As a result, in the next round of labor negotiations, unions demand and obtain higher wages for their members. The following graph shows the long-run aggregate supply curve (LRAS) at full-employment output for this economy as well as the same initial short-run aggregate supply curve as in the first graph. Shift one or both of these lines to illustrate how the economy adjusts to a new long-run equilibrium.Interpret the change you drew on the previous graph by filling in the blanks in the following paragraph: The higher-than-expected price level causes firms to earn profit than they expected on each unit of output they produce, and, therefore, they their production level. At the same time, the real value of wages and other resource prices is than workers and firms expected when they signed long-term contracts. As a result, the economy as a whole produces at a level its full-employment output, and the unemployment rate is than its natural rate. Now, suppose prices remain higher than expected. As a result, in the next round of labor negotiations, unions demand and obtain higher wages for their members. The following graph shows the long-run aggregate supply curve (LRAS) at full-employment output for this economy as well as the same initial short-run aggregate supply curve as in the first graph. Shift one or both of these lines to illustrate how the economy adjusts to a new long-run equilibrium. ?) 240 O 200 SRAS LRAS 160 SRAS PRICE LEVEL (CPI) 20 80 40 LRAS 3 6 9 12 15 15 REAL GDP (Trillions of dollars)The following graph shows several aggregate demand and aggregate supply curves for an economy whose potential output is $5 trillion. The curves are labeled a, b, c, and d. Three points on the graph are also indicated by grey stars and labeled K, L, and M. ? 100 5, 70 PRICE LEVEL (CPD) 5 REAL GDP (Trillions of dollars) Identify which curve on the previous graph corresponds to each of the following descriptions. If the carve described is not shown on the graph, choose Not Shown. In the descriptions, AD represents aggregate demand; SRAS represents short-run aggregate supply; LRAS represents long-run aggregate supply Description a b C d Not Shown BRAS if the expected price level is 50 O O O O SRAS if the expected price level is 70 O O O O O -RAS O O O O O O O O O O SRAS if the expected price level is 60 O O O O Suppose the economy is currently in short-run equilibrium at point L. In this case, the economy is producing at an output level its potential output. At current prices and wage levels, real wages are what firms and workers expected when they agreed on wage contracts. In the long run, if the price level and the nominal wage are both flexible, wages will , which will cause the curve to shift to the . Assuming the other two curves do not change, the economy will reach a new equilibrium at an output of and a price level of
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