Answer to Question #97433 in Macroeconomics for Tiffany

Question

Apply your knowledge of the AD/AS model to predict the effect on economic variables of some events on the U.S. economy. Diagram the effect of the following events. Explain the effects in the short run and effects in the long run . Assume that the economy starts at long-run equilibrium.
d.Suddenly, foreign countries sell great quantities of important inputs such as steel and computer chips at very low prices in this country.long-run effect will depend on whether the price decrease is permanent or not.

Answer 1

Considering the graph below;

              

In the long-run when the aggregate demand shift to the right or left there is no change in real GDP there is drastic increase in price levels in the economy. This can be as a result of increase in population, increase in capital stock and technological progress.

In the short-run when the aggregate demand curve shift to the right the real GDP and price level increases. This can be as a result of an exogenous decrease in the wage rates, increase in physical capital stock and technological progress. When the aggregate demand curve shift to the left the vice versa is true and it can be as a result of exogenous increase in wage rates, decrease in capital stock and poor technology applied in production. Because of the left shift of the aggregate demand most product`s prices levels drop and therefore they are relatively cheap