Answer the following with respect to the diagrams below: Explain in your own wor
ID: 1191848 • Letter: A
Question
Answer the following with respect to the diagrams below: Explain in your own words why in Economy A wages and other factor prices will begin to rise, and why this will increase firms' unit costs. Following your answer in part a, show the effect on the AS curve. Explain in your own words what happens to real GDP and the price level. Explain in your own words why in Economy B wages and other factor prices will begin to fall, and why this will decrease firms' unit costs. Following your answer in part c, show the effect on the AS curve. Explain in your own words what happens to real GDP and the price level.Explanation / Answer
a) Assuming that the demand is constant, E shown here is short-run equilibrium now long run equilibrium will be when AS, AD and Y* meet at a single point. So here in short run economy is producing more output than Y* so there is an inflationary gap and employment is above the natural rate of employment now output will decrease shifting the AS curve to the left so prices will go up.which will further result in increase in wages and factor prices while employment will slowly move to natural rate of employment.
b) The AS curve will shift to the left which will result in increase in price level and decrease in GDP
c) Assuming that the demand is constant, E shown here is short-run equilibrium now long run equilibrium will be when AS, AD and Y* meet at a single point. So here in short run economy is producing less output than Y* so there is a recessionary gap and employment is below the natural rate of employment now output will increase shifting the AS curve to the right so prices will go down.which will further result in decrease in wages and factor prices while empolyment will slowly move to natural rate of employment.
b) The AS curve will shift to the right which will result in decrease in price level and increase in GDP
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