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Chapter 24: Problem 1

Describe the relationship of the \(A D,\) SRAS, and LRAS curves when the economy is in long-run macroeconomic equilibrium.

Short Answer

Expert verified
In long-run macroeconomic equilibrium, the Aggregate Demand (AD), Short Run Aggregate Supply (SRAS), and Long Run Aggregate Supply (LRAS) curves all intersect at a single point. This intersection point represents an economic state where the quantity of goods and services demanded equals the quantity of goods and services supplied, and the economy is producing at its full-employment level of output.

Step by step solution

01

Understand the AD, SRAS, and LRAS curves

Firstly, each of these curves needs to be understood in isolation. The Aggregate Demand (AD) curve represents the total demand for goods and services within an economy. The Short-Run Aggregate Supply (SRAS) curve represents the total quantity of goods and services supplied by businesses in the short run. The Long-Run Aggregate Supply (LRAS) curve depicts the overall supply of goods and services when unemployment is at a natural rate.
02

Recognize the state of the economy in long-run equilibrium

When the economy reaches its long-run macroeconomic equilibrium, all three curves intersect at a single point. This point defines the real Gross Domestic Product (GDP) and the price level at equilibrium where the total demand equals the total supply in the economy.
03

Relate the AD, SRAS, and LRAS curves

In a scenario of long-run macroeconomic equilibrium, the AD, SRAS, and LRAS curves intersect at the same point. This means that the total quantity of goods and services that households, firms, and the government intend to buy (aggregate demand) equals the total quantity that its firms would like to produce (aggregate supply), and this quantity is at a level that’s consistent with its full-employment level of output (which the LRAS curve depicts).

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Most popular questions from this chapter

Why does the short-run aggregate supply curve slope upward?

Explain why the long-run aggregate supply curve is vertical.

An article in the Economist discussing the \(2007-2009\) recession stated that "employers found it difficult to reduce the cash value of the wages paid to their staff. (Foisting a pay cut on your entire workforce hardly boosts morale.)" a. During a recession, couldn't firms reduce their labor costs by the same, or possibly more, if they laid off fewer workers while cutting wages? Why did few firms use this approach? b. What does the article mean by firms reducing the "cash value" of workers' wages? Is it possible for firms to reduce workers' wages over time without reducing their cash value? Briefly explain.

What are menu costs? If menu costs were eliminated. would the short-run aggregate supply curve be a vertical line? Briefly explain.

What variables cause the long-run aggregate supply curve to shift? For each variable, identify whether an increase in that variable will cause the long- run aggregate supply curve to shift to the right or to the left.
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