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Chapter 24: Problem 1

What are the key differences between the basic aggregate demand and aggregate supply model and the dynamic aggregate demand and aggregate supply model?

Short Answer

Expert verified
Key differences are primarily how these models respond to changes and address expectations. The basic AD/AS model assumes adjustments in price and output occur instantaneously to maintain equilibrium whereas the DAD/DAS model allows for gradual adjustments over time taking into account past and expected economic conditions. Additionally, the equilibrium in the DAD/DAS model is path-dependent, implying that current equilibrium depends on past equilibria.

Step by step solution

01

Understanding the Basic AD/AS Model

Understand the basic AD/AS model. This is a macroeconomic model that explains price level and output, where AD represents the total demand for goods and services produced in an economy and AS represents the total supply of goods and services that firms produce under specific income levels. The interaction between AD and AS defines the equilibrium output and price level in an economy.
02

Understanding the Dynamic AD/DAS Model

Understand the dynamic AD/DAS model. This is an extension of the basic AD/AS model and includes time as a factor. Unlike the basic model, AD and AS are more responsive to changes in the economy due to the inclusion of expectations about the future. Here, DAD represents the rate at which demand grows and DAS represents the rate at which supply grows.
03

Identifying the Differences

Identify the differences. The key differences between the basic model and the dynamic model include how they address expectation and adjustment over time. In the basic model, prices and output adjust instantaneously to maintain equilibrium while this is not the case in the dynamic model. The dynamic model includes time, meaning adjustments happen progressively, taking into consideration past and expected future economic conditions. Another major difference is that in the dynamic model, the equilibrium is path-dependent, meaning that current equilibrium depends on past equilibria.

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Most popular questions from this chapter

Briefly explain how each of the following events would affect the aggregate demand curve. a. An increase in the price level b. An increase in government purchases c. Higher state personal income taxes d. Higher interest rates e. Faster income growth in other countries f. A higher exchange rate between the dollar and foreign currencies

The subtitle of a Wall Street Journal article about the economy in the euro zone (the 19 European countries that use the euro as their currency) was "Fourth-Quarter Output, Lowest Unemployment in Seven Years, Higher Inflation Eases Some Concerns." Use an aggregate demand and aggregate supply graph to show how the euro zone could experience both lower unemployment and higher inflation. Briefly explain what you are showing in your graph.

Briefly explain how each of the following events would affect the short-run aggregate supply curve. a. An increase in the price level b. An increase in what the price level is expected to be in the future c. A price level that is currently higher than expected d. An unexpected increase in the price of an important raw material e. An increase in the labor force participation rate

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

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.
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