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Chapter 24: Q 32. (page 602)

How is long-term growth illustrated in an AD/AS model?

Short Answer

Expert verified

This is illustrated below:

Step by step solution

01

Step 1. Introduction

The long-term growth of the economy in the AD/AS model is depicted by a shift towards the right on the AS curve. Surprisingly the potential GDP line shifts towards the right over a period of time that is vertical, as given in the graph below:

02

Step 2. Explanation

In the above graph. The potential GDP shifts in the long run (LR) from LRAS0 to LRAS1 to LRAS2 because equilibrium price shifts from E0 to E1 to E2 towards the right, corresponding to the price and real GDP.

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Most popular questions from this chapter

Suppose, after five years of sluggish growth, the European Union's economy picks up speed. What would be the likely impact on the U.S. trade balance, GDP, and employment?

During spring 2016the Midwestern United States, which has a large agricultural base, experiences above-average rainfall. Using the AD/AS diagram, what is the effect on output, the price level, and employment?

The imaginary country of Harris Island has the

aggregate supply and aggregate demand curves as Table 24.3shows.

a. Plot the AD/AS diagram. Identify the equilibrium.

b. Would you expect unemployment in this economy to be relatively high or low?

c. Would you expect concern about inflation in this

economy to be relatively high or low?

d. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275at every price level.

Identify the new aggregate equilibrium.

e. How will the shift in AD affect the original

output, price level, and employment?

Review the problem in the Work It Out titled

"Interpreting the AD/AS Model." Like the information provided in that feature, Table 24.2shows information on aggregate supply, aggregate demand, and the price

level for the imaginary country of Xurbia.

a. Plot the AD/AS diagram from the data. Identify

the equilibrium.

b. Imagine that, as a result of a government tax

cut, aggregate demand becomes higher by 50at

every price level. Identify the new equilibrium.

c. How will the new equilibrium alter output? How

will it alter the price level? What do you think

will happen to employment?

What is the economic reason why the SRAS curve slopes up?
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