Answer to Question #241070 in Macroeconomics for Akshat garg

Question

1

Using diagrams, show the effects of each of the following on short-run equilibrium, explaining what happens to the equilibrium price

level, output and unemployment.

a

The price of oil (an important input in production) increases.

b

Firms are pessimistic about the future of the economy

e

Below-zero temperatures destroy agricultural output.

d

The government lowers taxes on firms' profits.

e

There is a large rise in stock market prices.

f

The government eliminates subsidies on agricultural products.

g

A war destroys a portiolpof an economy's physical capital.

h

Consumer confidence improves.

Answer 1

(a) Due to an increase in price of an input in production, this implies that the production cost will rise and thus the output will decrease. The equilibrium price will increase. There will be reduced economic growth hence high rate of unemployment. This is because high oil prices will rise the rate of inflation.

(b)

The level of investment will decrease resulting to a decrease in aggregate demand. The rate of unemployment will rise . The supply will be less and hence the equilibrium price will be high.

(c)

The output will decrease implying a decline in supply. The rate of unemployment will rise and the equilibrium price will also rise because there will be more demand but the supply will be less.

(d)

Lowering of taxes will stimulate the growth of the rate of investments. Equilibrium prices will be cut down. The rate of unemployment will decline and there will be significant growth in the economy.

(e)

A large rise in stock market prices stimulates growth of the economy. There will be more investments because invetors' confidence will build up. The rate of unemployment will be cut down and the output will generally be increased.

(f)

The equilibrium price will increase. This is because the supply of agricultural products will be cut down due to an increase in the cost of production. The rate of unemployment will rise and the output will decrease.

(g)

The unemployment rate will rise and the output will decrease. Equilibrium price will increase. This is because the money supply in the economy will be reduced.

(h)

When consumer confidence increases, more will be demanded implying that the output will be increased. High output implies that the rate of unemployment will be lowered. An increase in output also implies that the equilibrium price will be lowered.