ECON 101 Lecture Notes - Lecture 32: Federal Funds Rate, Aggregate Demand, Aggregate Supply

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ochrehornet578

22 Dec 2020

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The effects of a shift in aggregate demand: Decide if it shift aggregate demand or aggregate supply (or both) Use the diagram of aggregate demand and aggregate supply to determine the impact on output and the price level in the short run. Use the diagram of aggregate demand and aggregate supply to analyze how the economy moves from its new short run equilibrium to its long run equilibrium. Determine the effects of a wave of pessimism (say, distrust caused from a scandal at the white house) the aggregate demand curve to the left. Because it will affect spending, it affects the aggregate demand curve. Because houses and firms will buy less for any given price level, it shifts. A decrease in aggregate demand causes output to fall in the short run. But over time, the short run aggregate supply curve shifts right and output returns to its natural state.

Related Questions

Most economists use the aggregate demand and aggregate supply model primarily to analyze

a. short-run fluctuations in the economy.

b. the effects of macroeconomic policy on the prices of individual goods.

c. the long-run effects of international trade policies.

d. productivity and economic growth.

yellowdog130

It is stated that the equilibrium level of output is the most important concept in all of economics. The economy is at its best when short-run supply and aggregate demand intersect in the long-run aggregate supply curve. Suppose we are at this point. Now suppose that there is a positive aggregate demand shock that shifts out the aggregate demand curve in the short run.

What is the impact on both the quantity supplied and price?

How does the economy adjust back to the long run if the government takes NO corrective action?

What would be the impact if the government does take action to get the economy back to the long run?

azureguinea-pig380

a) Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 2(M/P) and M = 1,500.

i) If the economy is initially in long-run equilibrium, what are the values of P and Y?

ii) What is the velocity of money in this economy?

b) Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 3(M/P) and M = 1,000.

i) Suppose a supply shock moves the short-run aggregate supply curve to P=1.5. What are the new short run P and Y? What will be the new long run P and Y?

ii) Suppose that immediately after the supply shock the Federal Reserve Bank wanted to hold output at its long-run level. What level of M would be required? If this level of M were maintained, what would be long-run equilibrium P and Y?

iii) If M increases to 2,000, what are the new short-run values of P and Y?

iv) Once the economy adjusts to long-run equilibrium at M = 2,000, what are P and Y?

c) Use the aggregate demand

bronzehamster418

ECON 101 Lecture Notes - Lecture 32: Federal Funds Rate, Aggregate Demand, Aggregate Supply

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