1. Identify the most important factor shifting the AS curve in the long term. Br
ID: 1227570 • Letter: 1
Question
1. Identify the most important factor shifting the AS curve in the long term. Briefly explain both how and why this factor shifts the aggregate supply curve.
2. Briefly discuss what consumer and business confidence in the economy typically reflects and provide examples. Contrast the effects of high consumer and business confidence with low levels of the same. Briefly explain how a rise in confidence will be reflected in the aggregate supply-aggregate demand model.
3. Identify and briefly describe the main ideas Keynesian economics is based on.
4. Identify and briefly explain the neoclassical argument and the key building blocks of neoclassical approach.
Explanation / Answer
1. The major factor shifting the production process is the change in production cost due to change in the price of inputs or due to change in wages of the labor and also the change in producitivity. A decrease in production cost shifts the AS curve to the right while an increase in the production cost shifts the AS curve to the left.
2. The confidence of the producers and consumers in the economy depends on the actual conditions of the economy. When the economy is doing well or is in a boom, the consumer confidence is high and it is low when there is recession or depression in the economy.
A higher confidence implies more spending and more investment, which implies shift of aggreagte demand towards the rights.
3. The main ideas of the keynesian economy are-fiscal policy is more effective than monetory policy, the economy is not always in the full full employment, as classicals believe it is. Also, the role of government is very important for thw working of the economy.
4. The main argument put forward by neoclassical economists is that in the long run, economy move backs to its long run level of GDP. The major building blocks of this approach are the prices and wages are flexible in the long run. therefore the long run level of GDP is restored. Also, the size of the economy depends on the growth of potential GDP.
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