Aggregate Demand and Aggregate Supply 7

Aggregate Demand and Aggregate Supply 7 - Economic...

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Unformatted text preview: ?. Economic fluclnafions II I} The following graph shows the short—run aggregate supply curve (AS), the aggregate demand curve (AD), and the long—run aggregate supply curve (LRAS) for a hypothetical economy. Initially, the expected price level is equal to the actual price level, and the economy is in long—run equilibrium at its natural level ofoutput, $110 billion. Suppose a bout of severe weather drives up agricultural costs, increases the costs of transporting goods and services, and increases the costs of producing goods and services in this economy. Use the graph to heip you answer the questions about the short—run and long—run eflfiects of the increase in production costs that foiiow. (Note: You wiii not be graded on any adjustments made to the graph.) Hint: For simplicity, ignore any possible impact ofthe severe weather on the natural level ofoutput. ® 13D L + 125 AS AD 12D —i:i— J 115 as LIJ E E II HID D 95 9D 9D 95 1DD 1D5 11D 115 12D 125 13D OUTPUT {Billie ns of dollars} The shortsrun economic outcome resulting from the increase in production costs is known as slagflalion if . fiPoints:_1,e'1 90 95 100 105 111'} 115 120 125 OUTPUT{BiIIiuns of dollars) Now suppose that the government decide; not to lake any aclinn in response to the short—run economic impact of the severe weather. In the long—run, when the government does nothing, the output in the economy:r will be $110 I billion billion and the price level will be 110 I . ---------+ 90 95 100 105 1111'.| 115 120 125 1341'.| OUTPUT {Billions of dollars] ...
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  • Spring '09
  • NERVO
  • Supply And Demand, aggregate supply curve, ECON-2301, natural level ofoutput

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