question archive 7) Consider a typical aggregate demand and supply curve of an economy operating at its long-run equilibrium
7) Consider a typical aggregate demand and supply curve of an economy operating at its long-run equilibrium
Subject:EconomicsPrice: Bought3
7) Consider a typical aggregate demand and supply curve of an economy operating at its long-run equilibrium.
a.Express the condition for long-run
equilibrium and graphically show the long-run equilibrium of this economy in an AD-AS diagram.
b.Explain and graphically show how a positive AD shock
affects the short
-
run
equilibrium
of this economy. How do the price level and rGDP change in the
short term
as a result?
c.
Does the positive AD shock result in a recessionary gap or an inflationary gap?
Explain and clearly indicate the size of the gap.
d.
What does this short
-
term output gap imply in terms of the rate of usage of
factors of production compared to th
e normal rate indicated by potential output:
higher rate of usage or lower than the normal rate?
e.
How does rate of usage of factors of production you indicate in part (d) impact
the price of factors of production?
f.
What does the impact you identify in part (
e) imply in terms of the unit cost of
production for firms?
g.
What does the impact you identify in part (f) imply in terms of the profits of
firms if the price of their product, quantity of production, and amount of factors
of production they use for product
ion remain constant?
h.
To remain as profitable as before, firms should increase their price at all levels
of production level in response to the impact on their unit
-cost of production
How to do no.7?
