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Unformatted text preview: rises. As the price level rises, desired aggregate expenditure is
choked off—this is a movement upward and along the new AD curve.
Thus Economy A, the one with demand-determined output has a larger multiplier than
Economy B 3. Suppose that the Japan’s economy is currently in long-run equilibrium. 010_1
a. Draw a correctly labelled graph of aggregate demand and short run aggregate supply and show
each of the following.
i. The long-run aggregate supply curve, labelled as LRAS.
ii. The current equilibrium output and price levels, labelled as YE and PLE, respectively. LRAS
Price Level AS1
a negative AS shock PL1 A adjustment process PL2 = PLE B Y1 Y2 = YE =Y* 3 / 4 AD Real GDP SFU Econ 105 Week 9 Summer 2013 b. Consider the following news article from New York Times, USA, March 13, 2011.
…….While the nation[Japan]’s industrial clusters in the south and west seemed to be
spared the worst, the crisis at damaged nuclear plants north of Tokyo was threatening to
cause an energy squeeze that could set back all sectors of Japan’s economy. To help
bring electricity back to the devastated areas, utilities across Japan are cutting back and
sharing power, imposing rolling blackouts that will affect factories, stores and homes
throughout the nation. The emergency effort is expected to last up to two weeks, but could
i. What kind of shock occurred- AD or AS? Explain and show the effects of the shock on the short
run economy. This is a cause of a negative AS shock; Japan’s industries faced a temporary shortage
of electricity supply that lowers productivity. Therefore, unit costs would rise over all
levels of real GDP.
ii. On the graph in part (a), show the likely short run macroeconomic equilibrium in Japan’
economy, in collaboration with your analysis in part (b), labelled as Y1 and PL...
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- Summer '08
- Macroeconomics, Assignments