Chat with AIExam 16: Long-Run Macroeconomic Adjustments
Describe the characteristics of the long-run aggregate supply curve.Explain how changes in the price level affect the short-run aggregate supply curve and the long-run aggregate supply curve.
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VerifiedThe long-run aggregate supply curve will be vertical at the full-employment level of output.Changes in the price level will not affect the full-employment level of output in the long-run.Changes in the short-run aggregate supply curve will define the long-run aggregate supply curve at the full-employment level of output.
With the short-run aggregate supply curve,as the price level increases from the full-employment level of output along the curve,revenues to the firm increase because nominal wages are fixed,and the profits for firms will rise.Firms will have an incentive to increase output and employment (hiring temporary or part-time workers or paying for overtime),so real GDP will increase and unemployment will fall below its natural rate.This situation is a short-run one because nominal wages (and other input prices)will eventually increase and shift the short-run aggregate supply curve to the left.The new equilibrium will return to the full-employment level of output,but at a higher price level.
Conversely,as the price level decreases from the full-employment level of output,revenues to the firm decrease and because nominal wages are fixed,the profits for firms will decrease.Firms will have an incentive to decrease output and employment,so real GDP will decrease and employment will fall below its natural rate.This situation is a short-run one because nominal wages (and other input prices)will eventually decrease and shift the short-run aggregate supply curve to the right.The new equilibrium will return to the full-employment level of output,but at a lower price level.
Explain the Phillips Curve concept and construct an example of the curve on the below graph.
(30) Verified
The Phillips Curve concept shows a stable inverse relationship between the rate of unemployment and the rate of inflation.It is based on the idea that as aggregate demand increases when real GDP is relatively low,unemployment will decline and real GDP will rise with little or no inflationary effect.However,as aggregate demand continues to grow and the unemployment rate approaches full-employment,the price level and real GDP will increase.See graph below. 
Explain what happens in the long-run aggregate demand-aggregate supply model when there is a recession.Assume that the economy is initially at the full-employment level of real GDP.
(40) VerifiedA recession occurs when the aggregate demand curve shifts left.As the price level decreases from the full-employment level of output,revenues to the firm decrease,and because nominal wages are fixed,the profits for firms will decrease.Firms will have an incentive to decrease output and employment (to reduce labour cost),so real GDP will decrease and unemployment will rise above its natural rate.This situation is a short-run one,however,because nominal wages (and other input prices)will eventually decrease and shift the short-run aggregate supply curve to the right.The new equilibrium will return to the full-employment level of output but be at a lower price level.
What is the long-run equilibrium in the aggregate demand-aggregate supply model?
(37) Describe the characteristics of the short-run aggregate supply curve.Explain what happens to: (1)nominal wages; (2)real wages profits as the price level increases from the full-employment level of output.Then explain what happens to these variables as the price level decreases from the full-employment-level of output.
(31) Suppose the potential level of real GDP for a hypothetical economy is $160 and the price level (P)initially is 200.Use the following short-run aggregate supply schedules to answer the questions.
(38) (a)Using a graph showing aggregate demand,short-run aggregate supply,and long-run aggregate supply,illustrate an economy that faces a recessionary gap.
(34) What are three significant generalizations regarding the inflation-unemployment relationship that are supported by results from the long-run AD-AS model?
(32) Suppose the potential level of real GDP for a hypothetical economy is $250 and the price level (P)initially is 100.Use the following short-run aggregate supply schedules below to answer the questions.
(27) What is the Laffer Curve? Explain the relationship that is shown in the curve.
(42) In general,the Canadian economy has experienced ongoing inflation.Explain how this is possible.
(34) Describe cost-push inflation in the long-run aggregate demand-aggregate supply model.Explain the policy dilemma for government policy if no action is taken and if monetary and fiscal policies are used to counter the cost-push inflation.Assume that the economy is initially at the full-employment level of real GDP.
(39) If the Phillips Curve exists in reality,what dilemma does this create for fiscal and monetary policies? Explain.
(40) Differentiate between "demand-pull" and "cost-push" inflation using the aggregate demand-aggregate supply model.
(37) What is stagflation and what was one of its causes in the 1970s and early 1980s?
(41) Why is the difference between the actual and expected rates of inflation important for explaining rising inflation?
(39) Describe the process that occurs with demand-pull inflation in the long-run aggregate demand-aggregate supply model.Assume that the economy is initially at the full-employment level of real GDP.
(36) 
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