Answer to Question #229374 in Macroeconomics for Katrichie

Question

Use AD-AS analysis to show how each of the events below will affect the equilibrium price level and real output in an economy in the short run (your answer must include a graph and explanation in words)

4. 1.Workers expect inflation to rise and negotiate higher money wages today (6 marks) 4.2. New technology increases the productivity of workers (6 marks)

4.3. Consumers expect the economy to go into recession. (6 marks)

4.4 Explain briefly why a monetary contraction for a small open economy under fixed exchange rates will have no effect on real income. (4 marks)

4.5 Define the AD curve and show graphically how the AD curve is derived. (7 marks) 

Answer 1

4.1

4.2)

However, in this case it will be P1 to P0 and Y1 to Y0

4.3)

4.4) Monetary contraction tends to shifts LM curve towards left-side pressuring downwards o exchange rate. Central bank is normally scheduled to original rate as people sell it's foreign currency to purchase domestic currency.Further, this increases supply of money while the output is never affected.

4.5) AD curve usually represent total quantity of services and goods the economy demands at different level of prices.