Answer to Question #273854 in Macroeconomics for Tenn

Question

1. Explain how the following changes in aggregate demand or short-run aggregate supply, other things held unchanged, are likely to affect the level of total output and the price level in the short run. a. An increase in aggregate demand b. A decrease in aggregate demand c. An increase in short-run aggregate supply d. A reduction in short-run aggregate supply 2. Explain why a change in one component of aggregate demand will cause the aggregate demand curve to shift by a multiple of the initial change. 3. Use the model of aggregate demand and short-run aggregate supply to explain how each of the following would affect real GDP and the price level in the short run. a. An increase in government purchases b. A reduction in nominal wages c. A major improvement in technology d. A reduction in net exports

Answer 1

1 a. An increase in aggregate demand

In the short-run aggregated market, an increase in aggregate demand leads to an increase in price level and actual production. The shock's real-production level can be higher or lower than full-employment real-production levels.

 b. A decrease in aggregate demand

In the short-run , a fall in aggregate demand leads to a decline in the level of prices and a reduction in real production. Reduced high inflation in the near future encourage the household sector to reduce current consumption expenditures in anticipation of lower future prices.

c. An increase in short-run aggregate supply 

The supply rises as the price increases in the short run aggregate supply. Given a factor, such as the real wage rate, the AS curve is drawn. The relative wage rate is assumed to be fixed in the short run. As a result, growing P means larger profits, which justifies increased productivity.

d. A reduction in short-run aggregate supply 

Short-run aggregate supply movements in response to price and production changes. As the price level falls and GDP rises, the short-run curve swings to the right. The price level rises as the curve changes to the left, but GDP falls.

2. Explain why a change in one component of aggregate demand will cause the aggregate demand curve to shift by a multiple of the initial change.

When one of the multiple elements of aggregate demand (AD) changes, the AD changes as well. Consumer spending (C), investment expenditure (I), public spending (G), and exports of goods and services are the four components of AD (NX). When one of these components changes, it causes an initial change in AD that is proportional to the change. However, over time, a change in one of the AD components requires variation in the other components, resulting in changes in the AD curve that is greater than the initial shift.

 3 a. An increase in government purchases

An increased government spending will cause the quantity demanded to shift to the right. Prices and GDP will both rise in the short term. This causes labor market tightening, which enhances inflation expectations and pulls the short-run aggregate supply curve upward.

 b. A reduction in nominal wages

In reaction to the increase in Aggregate demand, output increases to Y and the new price climbs to PL. Real wages fall when the price level increases, although nominal wages remain constant in the near term.

c. A major improvement in technology

According to the development principle of neoclassical theory, technological revolution raises per capita income, encourages savings and investments, and raises real GDP. If technological progress is halted, growth will be halted as well.Technological advancements that increase the efficiency of production will cause a supply curve to shift to the right. Consumers will purchase more of the goods at lower costs as the production cost falls. Electronics manufacturers strive to improve product quality while lowering production costs.

 d. A reduction in net exports

Net exports (exports minus imports) fall when exports fall and imports rise. Because export prices are an element of real GDP, when net exports fall, so does demand for real GDP. The net impact is triggered when the current price changes, resulting in a change in total expenditures and a shift along the ad curve. A rise in the general price level, in instance, boosts imports while decreasing exports, resulting in a fall in net exports.