1) Now, let’s apply your knowledge of the AD / AS model to predict the effect on
ID: 1213826 • Letter: 1
Question
1) Now, let’s apply your knowledge of the AD/AS model to predict the effect on economic variables (i.e., P, RGDP, interest rates, wages, savings and spending) of some events on the U.S. economy. Diagram the effect of the following events. Be sure to explain the effects in the short run and effects in the long run for each question, in words. To keep things clear, assume that in each case the economy starts out at long-run equilibrium.
A) Suddenly, foreign countries sell great quantities of important inputs such as steel and computer chips at very low prices in this country. Hint: the long-run effect will depend on whether the price decrease is permanent or not.
B) Households significantly reduce their spending and start saving a larger portion of their income, leading to a decrease in interest rates. Hint: Think about another sector of the economy and how it might respond to lower interest rates and what effect this will have on the model.
2) Households significantly reduce their spending and start saving a larger portion of their income, leading to a decrease in interest rates. Hint: Think about another sector of the economy and how it might respond to lower interest rates and what effect this will have on the model.
Explanation / Answer
1)when foreign countries sell at lower price, import price decreases. so RGDP may increase if the quantity remain same.price also decreases.in short run spending may increase but in LR it will be in equilibrium.
2)when interest rate decreases, spending will increase in other sector, RGDP increases, P increases,
3)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.