Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 24: Problem 4

An article in the Wall Street Journal noted that real GDP in Greece declined during \(2016 .\) The article stated that economists "attributed it to a \(2.1 \%\) decline in [government spending] and weaker net exports" a. Use a basic aggregate demand and aggregate supply graph (with LRAS constant) to illustrate what happened in Greece in 2016 b. On your graph, show the adjustment back to long-run equilibrium. Source: Nektaria Stamouli, "Greek Economy Contracts at Faster Pace than Estimated Adding Hurdle to Bailout Talks," Wall Street Journal, March 6,2017

Short Answer

Expert verified
In part (a), the aggregate demand curve shifted to the left, leading to a lower short-run equilibrium. In part (b), the economy adjusted back to the long-run equilibrium through a rightward shift of the short-run aggregate supply line.

Step by step solution

01

Drawing Initial Equilibrium

The first step is to draw the long-run aggregate supply (LRAS) line as vertical. Next, plot the aggregate demand (AD) and short-run aggregate supply (SRAS) lines intersecting at a point on the LRAS line. This intersection point represents the initial equilibrium.
02

Illustrating the Decrease in Aggregate Demand

The next step is to represent the impact of the decrease in government spending and weaker net exports. These factors would lead to a decrease in aggregate demand. Hence, the aggregate demand line (AD) should be shifted to the left, indicating a decrease in aggregate demand.
03

Marking the New Short-run Equilibrium

Due to the leftward shift in the aggregate demand line, the new intersection point between the aggregate demand and short-run aggregate supply lines also shifts to the left. We mark this new intersection point, which represents the new short-run equilibrium.
04

Transition to the Long-run Equilibrium

Finally, plot the transition from the short-term equilibrium back to the long-run equilibrium due to automatic mechanisms of the economy. This involves the short-run aggregate supply line (SRAS) shifting to the right until it intersects again with both the aggregate demand line (now in its new position) and the long-run aggregate supply line.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

An article in the Economist noted that "the economy's potential to supply goods and services [is] determined by such things as the labour force and capital stock, as well as inflation expectations." Briefly explain whether you agree with this list of the determinants of potential GDP.

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.

As output increases along the short-run aggregate supply curve, briefly explain what happens to the natural rate of unemployment and to the cyclical rate of unemployment.

Briefly explain how each of the following events would affect the long-run aggregate supply curve. a. A higher price level b. An increase in the labor force c. An increase in the quantity of capital goods d. Technological change

Draw a dynamic aggregate demand and aggregate supply graph showing the economy moving from potential GDP in 2019 to potential GDP in \(2020,\) with no inflation. Your graph should contain the \(A D,\) SRAS, and LRAS curves for both 2019 and 2020 and should indicate the short-run macroeconomic equilibrium for each year and the directions in which the curves have shifted. Identify what must happen for the economy to experience growth during 2020 without inflation.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free