1) Explain why the Aggregate Supply curve becomes increasingly steeply sloped at
ID: 1179836 • Letter: 1
Question
1) Explain why the Aggregate Supply curve becomes increasingly steeply sloped at levels of RGDP near "full employment" and becomes especially steeply sloped beyond "full employment" RGDP (hint: this topic is not discussed in your text... you will need to understand this week's lecture notes to answer this).
2) Why might the rate at which the Aggregate Supply curve shifts vertically upward increase when an economy produces beyond full employment. (Hint: think about the effect of very low unemployment rates on the balance of bargaining power between employers and workers)
3) Explain why inflation rates are likely to rise when an economy expands beyond full employment capacity output. Draw an aggregate supply-aggregate demand diagram to illustrate your answer. (Hint: utilize your answers to #1 & #2 to answer this question)
Explanation / Answer
1) Explain why the Aggregate Supply curve becomes increasingly steeply sloped at levels of RGDP near "full employment"ANSWER----BECAUSE AS RGDP GOES NEAR FULLEMPLOYMENT LEVEL THERE BECOMES SHORTAGE IN THE AVAILABILITY OF RESOURCES. SO EVEN WITH HE BIG INCREASE IN PRICES SUPPLY DOESNOT INCREASE MUCH.SO SUPPLY CURVE AT THAT TIME BECOMES LESS ELASTIC.
QUESTION---and becomes especially steeply sloped beyond "full employment" RGDP. ANSWER--it is because at this level of RGDP RESOURCES ARE FULLY EMPLOYED AND EVEN IF THE DEMAND INCREASES OR THE PRICES INCREASE THE SUPPLY CAN NOT BE INCREASED BECAUSE RESOURCES ARE ALREADY FULLY EMPLOYED. SO SUPPLY CURVE BECOMES PERFECTLY INELASTIC i>e> PARALLEL TO Y-AXIS.
2) Why might the rate at which the Aggregate Supply curve shifts vertically upward increase when an economy produces beyond full employment.
ANS...BECAUSE AT THIS POINT WITH THE INCREASE IN AGGRATE DEMAND, SUPPLY CAN NOT BE INCREASED BECAUSE NO MORE RESORCES TO INCREASE THE PRODUCTION. AND SUPPLY CURVE BECOMES PERFECTLY IN ELASTICE . SO INCREASED AGREGATE DEMAND FORCES THE PRICES TO GO UP.
) Explain why inflation rates are likely to rise when an economy expands beyond full employment capacity output. Draw an aggregate supply-aggregate demand diagram to illustrate your answer
ANS-- inflation rates are likely to rise when an economy expands beyond full employment capacity output BECAUSE AT THIS POINT TRHE CURRENT AGGRGATE DEMAND IS IN EXCESS OF AGGREGATE DEMAND AT FULL EMPLOYMENT OF RESOURCES. THIS EXCESS DEMAND LEADS TO AN EQUILIBRIUM LEVEL OF INCOME THAT IS MORE THAN FULL EMPLOYMENT LEVEL OF INCOME WHICH LEADS TO INFLTION RATES RISE.
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