6. Aggregate demand and supply model (AD-AS) and the Macroeconomy. (4*5-20 pts)

Question

6. Aggregate demand and supply model (AD-AS) and the Macroeconomy. (4*5-20 pts) a. What are the major components of aggregate demand? What government policies can b. What is a long run aggregate supply curve? What determines its level? Why is it not c. What is a short run aggregate supply curve? Why the price level P can affect Y in the d. According the quantity theory MV-PY, if money is neutral, what is the implication for change AD? affected by P level? short run? the aggregate supply curve? If money is not neutral, what is the implication for the aggregate supply curve? Explain. e. Can the AD-AS model explain both short run business cycle fluctuation and long run economic growth? Explain. f. During the recent financial crisis, the U.S. government took drastic actions to save the economy out of recession, including unprecedented monetary expansion and fiscal stimulus. Apply the AD-AS model to illustrate the effects of government policies on the economy. Does it work? [Bonus: 10 pts

Explanation / Answer

Answer a : As we know that AD is the total demand of final goods and services in an economy at a given time period.

Four different components are :

Fiscal policy changes aggregate demand through two ways such as :

Contraction of fiscal policy can shift the aggregate demand curve to the left.

(b) In the long run the aggregate supply curve is vertical which shows that in the long run the economics is ableto produce goods and services to meet demand is based on technology and availability of various factors taken into an account. In the long run scanerio the labour, land , capital and enterprenureship.
In the long run supply curve shift only when there is rise in the production capacity of the firm. It does not affect only when there is output potential has been increased.

It is not affected by the P level because flucation in the price does not affect the supply of output by the supplier in the long run time period.

Answer c : Short run aggregate supply curve means production of goods and services available in an economy with different price levels. it takes factor input price in an account.

In short run aggregate supply curve is upward sloping as higher prices make more profitable and enable business to expand there production by hiring less productive labour. Short run aggregate supply curve taken price level into an account so that supplier in in the new set up and there supply flucates with price.

(d) Acc to quantity theory of money, if money is kept to be neturalthan change in the money suppplydo not affect real variables. It means that they affect only nominal variables which means the affect of money supply is not on output. Aggregate supply curve remain constant.

Money is not kept as netural than it means change in money affect the money supply which make changes in real as well as nominal variables taken into an account. This shows money supply flucates.

Related Questions

Navigate

• Browse (All)
• Browse 6
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.