econ hw 4-1 - Q6 As aggregate demand increases given a...

Info icon This preview shows page 1. Sign up to view the full content.

Q6. As aggregate demand increases given a particular short-run aggregate supply curve, increases in real output are associated with increases in the price level. When real output increases, the unemployment rate decreases. The Phillips Curve shown on the right expresses the same relationship as the AD-AS model, but graphs as an inverse relationship because unemployment is on the horizontal axis rather than real output. Q7. In the short-run there is probably a tradeoff between unemployment and inflation. The government’s expansionary policy should reduce unemployment as aggregate demand increases. However, the government has misjudged the natural rate and will continue its expansionary policy beyond the point of the natural level of unemployment. As aggregate demand continues to rise, prices begin to rise. In the long-run, workers demand higher wages to compensate for these higher prices. Aggregate supply will decrease (shift leftward) toward the natural rate of
Image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: unemployment. The end result should be an equilibrium at the natural rate of unemployment and a higher price level than the beginning level. The long-run Phillips curve is thus a vertical line connecting the price levels possible at the natural rate of unemployment found on the horizontal axis. Q8. In the short-run, economists assume that production costs don’t change so the aggregate supply curve is fixed. Therefore, changes in aggregate demand are the sole determinant of unemployment and inflation rates. (Figure 35.1a) In the long-run, wages and input prices adjust to price changes causing a rise (or fall) in production costs and aggregate supply decreases (or increases) as shown in Figure 35.1b. This means the long-run relationship between price-level and output is vertical at the full-employment level of output. P4. upward...
View Full Document

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern