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Chapter_15_Key_Question_Solutions

# Chapter_15_Key_Question_Solutions - 15-3(Key Question...

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15-3 ( Key Question ) Suppose the full-employment level of real output ( Q ) for a hypothetical economy is \$250 and the price level ( P ) initially is 100. Use the short-run aggregate supply schedules below to answer the questions that follow: AS( P= 100 ) AS( P= 125 ) AS( P= 75 ) P Q P Q P Q 125 100 75 280 250 220 125 100 75 250 220 190 125 100 75 310 280 250 a. What will be the level of real output in the short run if the price level unexpectedly rises from 100 to 125 because of an increase in aggregate demand? What if the price level falls unexpectedly from 100 to 75 because of a decrease in aggregate demand? Explain each situation, using numbers from the table. b. What will be the level of real output in the long run when the price level rises from 100 to 125? When it falls from 100 to 75? Explain each situation. c. Show the circumstances described in parts a and b on graph paper, and derive the long-run aggregate supply curve. (a) \$280; \$220. When the price level rises from 100 to 125 [in aggregate supply schedule AS( P 100 )], producers experience higher prices for their products. Because nominal wages are constant, profits rise and producers increase output to Q = \$280. When the price level decreases from 100 to 75, profits decline and producers adjust their output to Q = \$75. These are short-run responses to changes in the price level. (b) \$250; \$250. In the long run a rise in the price-level to 125 leads to nominal wage increases. The AS( P 100 ) schedule changes to AS( P 125 ) and Q returns to \$250, now at a price level of 125.

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Chapter_15_Key_Question_Solutions - 15-3(Key Question...

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