Chapter 1. Chapter 10(21)

Step 1

Solved Problems
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You must read each slide, and complete any questions on the slide, in sequence.

Question

Consider the following graph. The aggregate demand (AD) curve, short-run aggregate supply (SRAS) curve, and long-run aggregate supply (LRAS) curve are given in this graph.

The horizontal axis is labeled Aggregate Output, and the vertical axis is labeled Aggregate Price Level. The graph shows the short-run aggregate supply curve, an upward sloping line labeled SRAS. The aggregate demand curve, labeled AD, is a downward sloping line that intersects the SRAS curve approximately in the center. The long-run aggregate supply curve, labeled LRAS, is a vertical line that runs through the intersection of the SRAS and AD curves.

Here, aggregate output is PZyWS25LUsPNO1iQAqy7iu3MA79TRuRJ013Fog== its full-employment level.

As the point of intersection between the SRAS and the AD curve lies on the LRAS curve, short-run aggregate output is equal to the long-run full-employment aggregate output.
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Step 2

Question

If the government decides to raise its level of spending, this is considered a(n) /L8PEWo9AqEA5s3I8CLKpoB2ecH5DF2tmmrVXkbhcDw=l/csuWbaa/QjCTBjyyTYGlNonSNfnH7qzSa5UQ==.

Government spending is fiscal policy, and increased spending expands GDP.
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Step 3

Question

When government increases expenditures, aggregate demand will WaIUn5kdGwfdkHlRRIxCQ1HwVB416R0CbePwdO3GrzKJzLf+.

Expansionary policy moves AD to the right.
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Step 4

Question

As a result of increased government expenditures, aggregate price level will 61DLO/cK1ZsKkudCw0rjg3GQF8M99yeuoObI8ZC04uw= and aggregate output will 61DLO/cK1ZsKkudCw0rjg3GQF8M99yeuoObI8ZC04uw=.

The new intersection point of SRAS and AD corresponds to increases in both aggregate price level and aggregate output.
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Step 5

Question

The horizontal axis is labeled Aggregate Output, and the vertical axis is labeled Aggregate Price Level. The graph shows the short-run aggregate supply curve, an upward sloping line labeled SRAS. The aggregate demand curve, labeled AD, is a downward sloping line that intersects the SRAS curve approximately in the center. The long-run aggregate supply curve, labeled LRAS, is a vertical line that runs through the intersection of the SRAS and AD curves.

Because the government stimulus pushes up prices, short-run aggregate supply will xGaQHDFDFPrYcQ7RC2KTXO2iXdL3d8Eib3y2q/LL+9lCV+oO in the long run.

Higher prices mean higher input costs. This reduces aggregate supply and pushes it left.
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Step 6

Question

As a result of the SRAS curve shifting left, CPI will 61DLO/cK1ZsKkudCw0rjg3GQF8M99yeuoObI8ZC04uw= and aggregate output will glF7EPUTyQCb040TpsxgbLwcBfpU0I6oGcbqYQim/uM=.

A leftward shift of the SRAS curve results in a new equilibrium in which aggregate price level increases and aggregate output level decreases.
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Step 7

Question

The ultimate result of this increased government spending is that: CPI is 9YrREXC+sjlY6ST2AEEl6BdQe69BqDAwQfGOZl8e4x3S6dAj6gckgw== the original price level, CPI is 9YrREXC+sjlY6ST2AEEl6BdQe69BqDAwQfGOZl8e4x3S6dAj6gckgw== the short-run price level immediately following the stimulus, aggregate output is ERmAljATUf5hC2nsjLD44gSncfgsD4aH0U+wDGhy0RYU57xEAiEGtg== the original output level, and aggregate output is cw0c6dRQDD31Av3sJlwE+dPTLWQjBRr4Jh/qmRjKDMVaeSdq/btv1Q== the short-run output level immediately following the stimulus.

The rightward shift in AD and the leftward shift in SRAS both push aggregate price level up, combining to result in a large increase in the price level. The rightward shift in AD increases GDP, but the leftward shift in SRAS lowers it. Since here, the original output level was already the full-employment level, any output increase is temporary.
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