Answered: Suppose the economy is in a long-run…

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter8: Macroeconomic Equilibrium: Aggregate Demand And Supply

Section: Chapter Questions

Problem 20E

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Question

Suppose the economy is in a long-run equilibrium.
a. Draw a diagram to illustrate the state of the
economy. Be sure to show aggregate demand,
short-run aggregate supply, and long-run
aggregate supply.
b. Now suppose that a stock market crash causes
aggregate demand to fall. Use your diagram
to show what happens to output and the price
level in the short run. What happens to the
unemployment rate?
c. Use the sticky-wage theory of aggregate supply
to explain what happens to output and the price
level in the long run (assuming no change in
policy). What role does the expected price level
play in this adjustment? Be sure to illustrate your
analysis in a graph.

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