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Unformatted text preview: n costs. Thus, unit costs fall
over all levels of national production.
As a result, real GDP rises, but a change in PL is ambiguous.
2. The following diagram show the AD and AS curves in two different economies.
P L PL ASB ASA ADA Economy A ADB Y Economy B Y a. Explain what aspect of firms’ behaviour might generate the horizontal AS curve in economy A. A horizontal AS curve reflects the fact that firms are prepared to supply any amount of
domestic output that is demanded by HHs, firms, Gov't and foreigners without requiring
because domestic firms would have excess capacity, or there are many idle resources
available for all levels of output produced, or firms are price-setters.
b. Explain what aspect of firms’ behaviour might generate the increasingly-sloped AS curve in
economy B. At low level of output, firms have excess capacity also there are many idle resources
available to national production. Thus, unit costs rise slowly with more output, thereby
prices of output rise slowly.
At the output is expanded beyond a national capacity or production scale, with a given set
of factor supplies, producing more output requires excessive use of existing economic
resources that puts an upward pressure on costs of production at the higher rate, or to
adopt expensive production methods. Thus, unit costs rise rapidly with more output
produced. 2 / 4 SFU Econ 105 Week 9 Summer 2013 c. Consider the effect of an increase in autonomous expenditures. Which economy has the largest
multiplier? Explain your reasoning. In Economy A, the AS curve is horizontal so equilibrium GDP changes by the full amount
of the AD shift without any price effects.
In Economy B, however, the change in equilibrium GDP is less than the full shift of the AD
because the price level...
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This note was uploaded on 01/20/2014 for the course ECON 105 taught by Professor Hanafiahharvey during the Summer '08 term at Simon Fraser.
- Summer '08
- Macroeconomics, Assignments