1) The AD / AS model is useful in predicting the effects of various shocks and p
ID: 1213998 • Letter: 1
Question
1) The AD/AS model is useful in predicting the effects of various shocks and policy changes on an economy. The model is based on goods and services being exchanged in well-functioning markets. In general, however, markets are not always perfect. Consider how the model would change as a result of market imperfections. (Hint: Can the AS/LRAS shift when there are governmental controls?)
A) How would the AD/AS model change if input prices, such as wages and raw material prices, were set by the government rather than in markets?
B) If the government sets input prices, what long-run effect would this have?
Explanation / Answer
Answer to Question A.)
Factors affecting Aggregate Supply. The factors that cause an increase in AS will shift the curve outward and to the right and those factors that cause a decrease in AS will shift the curve upward and to the left. B.
Answer to Question B.)
The Long-Run Aggregate Supply depicts the relationship between the price level and output in the long-run. It varies from the Short-Run Aggregate Supply in that no input prices are assumed to be constant.
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