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Chapter 18: Q6. (page 389)

Between 1990 and 2009, the U.S. price level rose by about 64 percent while real output increased by about 62 percent. Use the aggregate demand鈥揳ggregate supply model to illustrate these outcomes graphically.

Short Answer

Expert verified

The following figure illustrates a simultaneous rise in both price level and GDP level in the US economy.

Step by step solution

01

The short-run and long-run impact of rise in oil prices on the economy 

The AD-AS model establishes a relation between the price level and GDP level. Here, the US price level increases by 64 percent while real output increases by 62 percent. The increase in both price level and GDP level occurs due to the rightward shift of the aggregate demand curve.

The following figure illustrates the impact of the rightward shift in the aggregate demand curve on the US economy.

In the above figure, Ef is the long-run equilibrium point, Pf and Qf are the initial price and GDP level, respectively. Due to an increase in demand, the AD0 curve shifts rightwards to AD1. As a result price level rises from Pf to P1, and the actual GDP level rises from Qf to Q1. Thus, an inflationary impact is created in the US economy.

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Most popular questions from this chapter

What do the distinctions between short-run aggregate supply and long-run aggregate supply have in common with the distinction between the short-run Phillips Curve and the long-run Phillips Curve? Explain.

Suppose that an economy begins in long-run equilibrium before the price level and real GDP both decline simultaneously. If those changes were caused by only one curve shifting, then those changes are best explained as the result of:

a. the AD curve shifting right.

b. the AS curve shifting right.

c. the AD curve shifting left.

d. the AS curve shifting left.

Suppose the full-employment level of real output (Q) for a hypothetical economy is $250 and the price level (P) initially is 100. Use the short-run aggregate supply schedules below to answer the questions that follow:

AS(P100)
AS(P125)
AS(P75)
PQPQPQ
125280125250125310
100250100220100280
752207519075250

What is the level of real output in the short run if the price level unexpectedly rises from 100 to 125 because of an increase in aggregate demand? What happens if the price level unexpectedly falls from 100 to 75 because of a decrease in aggregate demand? Explain each situation, using numbers from the table.

b. What is the level of real output in the long run when the price level rises from 100 to 125? When it falls from 100 to 75? Explain each situation.

c. Illustrate the circumstances described in parts a and b on graph paper, and derive the long-run aggregate supply curve.

Suppose that AD and AS intersect at an output level that is higher than the full-employment output level. After the economy adjusts back to equilibrium in the long run, the price level will be _______.

a. higher than it is now

b. lower than it is now

c. the same as it is now

Suppose that the equation for a particular short-run AS curve is P = 20 + 0.5Q, where P is the price level and Q is real output in dollar terms. What is Q if the price level is 120? Suppose that the Q in your answer is the full-employment level of output. By how much will Q increase in the short run if the price level unexpectedly rises from 120 to 132? By how much will Q increase in the long run due to the price level increase?
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