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Chapter 10: Q. 3 LO (page 212)
Evaluate the meaning of long-run equilibrium for the economy as a whole and explain why economic growth can cause deflation
The deflation in an economy occurs when the total price in any country will fall and similarly if the total price rises, then the condition leads to inflation.
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For each question, sщpose that the exonorm begins at the long-run equilibrium point in the diagram below. Identify which of the other points on the diagram-points , or -could represent a new long-run equilibrium after the described events take place and move the economy away from point .
a. Significant productivity improvements occur, and the quantity of money in circulation increases.
b. No new capital investment takes place, and a fraction of the existing capital stock depreciates and becomes unusable. At the same time, the government imposes a large tax increase on the nation's households.
c. More efficient techniques for producing goods and services are adopted throughout the economy at the same time that the government reduces its spending on goods and services.
Why might a return of the U.S. population growth rate to its prior level also tend to boost the growth of U.S. Long-run aggregate supply? (Hint: Recall that real GDP growth is generated by the contributions of growth in labour and capital and growth in productivity of these resources.)
Explain whether each of the following events would cause a movement along or a shift in the position of the L.RAS curve, other things being equal. In each case, explain the direction of the movement along the curve or shift in its position.
a. Last year, businesses invested in new capital equipment, so this year the nation's capital stock is higher than it was last year.
b. There has been an 8 percent increase in the quantity of money in circulation that has shifted the curve.
c. A hurricane of unprecedented strength has damaged oil rigs, factories, and ports all along the nation's coast.
d. Inflation has occurred during the roast year as a result of rightward shifts of the curve.
Suppose that the long-run aggregate supply curve is positioned at a real GDP level of trillion in base-year dollars, and the long-run equilibrium price level (in index number form) is 115 . What is the full-employment level of nominal GDP?
In Figure 10-2, if the economy acquires a larger amount of capital goods in the current year, does a larger or smaller outward shift in the production possibilities curve result? Does the LRAS curve shift more or less far to the right? Why?
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