Q. 12 Explain whether each of the foll... [FREE SOLUTION]

Chapter 10: Q. 12 (page 229)

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 $A D$ 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 $A D$ curve.

Short Answer

Expert verified

a. The nation's capital stock of nation is on top of it had been last year so LRAS curve will shift rightwards.

b. Increase in quantity of cash generally brings a rise in aggregate demand or aggregate demand curve shifts rightwards and so there'll be upward movement along the LRAS curve.

c. That capital stock of nation would be below it absolutely was last year so LRAS curve will shift leftwards.

d. It's been stated that AD curve is shifting rightwards so there'll be upward movement along the LRAS curve.

Step by step solution

LRAS Rightward (a)

(a) Shift in position of LRAS curve happens when changeparturient or capital resources or in productivityof those resources is experienced from one year tothe following.
In case, increaseaborning or capital resources or in productivityof those resources is experienced from one year tothe subsequent then LRAS curve shifts rightwards whereas if decreaseparturient or capital resources or in productivityof those resources is experienced from one year tothe subsequent then LRAS curve shifts leftwards.

In the given case, capital stock of nation ison top of it had been last year so LRAS curve will shift rightwards.

AD Curve Rightward (b)

b) Shift in position of LRAS curve happens when changeaborning or capital resources or in productivityof those resources is experienced from one year tothe following.
Movement along the LRAS curve happens when capital stock,resource, and productivity remains same but change in aggregate demand is experienced.
Increase in aggregate demand or rightward shiftresults in upward movement along the LRAS curve and vice-versa.

In the given case, quantityof cash in circulation is increasing andit's shifted the AD curve. Increase in quantityof cash generally bringsa rise in aggregate demand or aggregate demand curve shifts rightwardsand so there'll be upward movement along the LRAS curve.

LRAS Curve Leftward (c)

(c) Shift in position of LRAS curve happens when changeaborning or capital resources or in productivityof those resources is experienced from one year tothe following.
In case, increaseparturient or capital resources or in productivityof those resources is experienced from one year tothe following then LRAS curve shifts rightwards whereas if decreaseparturient or capital resources or in productivityof those resources is experienced from one year tothe following then LRAS curve shifts leftwards.

In the given case, a hurricane of unprecedented strength has destroyed the oil rigs, factories etc.this suggests that capital stock of nation would bebelow it absolutely was last year so LRAS curve will shift leftwards.

AD Curve Rightward (d)

(d) Shift in position of LRAS curve happens when change parturient or capital resources or in productivity of those resources is experienced from one year tothe subsequent.
Movement along the LRAS curve happens when capital stock,resource, and productivity remains same but change in aggregate demand is experienced.
Increase in aggregate demand or rightward shiftends up in upward movement along the LRAS curve and vice-versa.
In the given case,it's been stated that AD curve is shifting rightwards sothere'll be upward movement along the LRAS curve.