ans8 - ANSWERS to HOMEWORK #8 E202 Spring 2008 The...

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ANSWERS to HOMEWORK #8 E202 Spring 2008 The following questions draw from the material in Chapter 15, a chapter so packed with macroeconomic insight that you should read it twice . 1. Explain why the long-run aggregate supply curve is vertical. Output of the economy in the long run is determined by the productivity of resources and technology, not the level of prices. A vertical LRAS indicates precisely that fact, i.e., that output in the long run is unrelated to the price level. Note that this is a geometric restatement of the classical dichotomy (from Chapter 12). 2. List and explain the three theories for why the aggregate supply curve is upward sloping. Misperceptions, sticky wages, and sticky prices. See pp. 330-332. 3. Draw a diagram with aggregate demand, short-run aggregate supply, and long-run aggregate supply. Be careful to label all curves and axes correctly. Note. The following graph is drawn with the economy in LR equilibrium. 4. a. What events would cause the aggregate demand curve to shift to the left? decrease G decrease C increase S increase T decrease I increase r decrease Ms decrease EX increase IM b. Use the AD-AS model to trace through the short-run and long-run effects of such a shift. See Figure 8 on page 336. SR effects: decrease in AD from AD 1 to AD 2 , which causes output to fall from Y 1 to Y 2 and unemployment to rise (note that the change in unemployment is
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not directly revealed by this model but is inferred from the decrease in output). Also, as a consequence of the shift, the price level falls from P 1 to P 2 . LR effects (not covered in lecture yet, but Mankiw gives a pretty clear explanation): As workers and firms adjust to the unexpected decrease in the price level, SRAS shifts right, causing an increase in output from Y 2 back to Y 1 and implicitly a decrease in unemployment. Also, as a consequence of the shift in SRAS, the price level falls from P 2 to P 3 , restoring the LR equilibrium. 5.
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This note was uploaded on 12/06/2011 for the course BA BAIU09 taught by Professor Ms.tra during the Spring '11 term at RMIT Vietnam.

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ans8 - ANSWERS to HOMEWORK #8 E202 Spring 2008 The...

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