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Chapter 11: Q.49 (page 293)

If firms become more optimistic about the future of the economy and, at the same time, innovation in 3-D printing makes most workers more productive, what is the combined effect on output, employment, and the price-level?

Short Answer

Expert verified

As an increase in demand equals an increase in supply, the curves move proportionately, resulting in the same price but an increase in the amount demanded and supplied, resulting in a rise in Real GDP.

Step by step solution

01

Aggregate supply curve :

The aggregate supply curve is a graph that shows how many goods and services a country's businesses are willing and able to create in a particular time period.

02

Investment increase impact : 

Firms will invest more in the economy to expand their production because they are optimistic about the economy's future prospects. With more investment, the AD curve will move to the right.

Higher production equals more productivity. It is a technical upgradation of current resources due to innovation in 3-D painting, which implies that the same amount of work will generate a huge amount of product. As a result, the whole supply curve will move to the right.

Because of increased investment, the demand curve shifted rightward from D to D1 in the above diagram. AD is made up of several components, one of which is investment.

Labor productivity grew as a result of the breakthrough in 3-D painting, resulting in a rightward shift in the AS curve.

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Most popular questions from this chapter

Review the problem in the Work It Out titled "Interpreting the AD/AS Model." Like the information provided in that feature, Table 11.2 shows information on aggregate supply, aggregate demand, and the price level for the imaginary country of Xurbia.

Price Level
AD
AS
110
700
600
120
690
640
130
680
680
140
670
720
150
660
740
160
650
760
170
640
770

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 50 at 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?

Would a shift of AD to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of AD to the left?

Some politicians have suggested tying the minimum wage to the consumer price index (CPI). Using the AD/AS diagram, what effects would this

policy most likely have on output, the price level, and employment?

Economists expect that as the labor market continues to tighten going into the latter part of 2015 that workers should begin to expect wage increases in 2015 and 2016. Assuming this occurs and it was the only development in the labor market that year, how would this affect the AS curve? What if it was also accompanied by an increase in worker productivity?

In your view, is the economy currently operating in the Keynesian, intermediate or neoclassical portion of the economy’s aggregate supply curve?
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