Scenario 1 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise...

Question:

Scenario 1

Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. 33 Given Scenario 1. Which curve shifts and in which direction?

a. aggregate demand shifts right

b. aggregate demand shifts left

c. aggregate supply shifts right

d. aggregate supply shifts left.

Given Scenario 1. In the short run what happens to the price level and real GDP?

a. both the price level and real GDP rise.

b. both the price level and real GDP fall.

c. the price level rises and real GDP falls.

d. the price level falls and real GDP rises.

Given Scenario 1. In the long run, the change in price expectations created by the stock market boom shifts

a. long-run aggregate supply right.

b. long-run aggregate supply left.

c. short-run aggregate supply right.

d. short-run aggregate supply left.

Aggregate Supply and Aggregate Demand Model:

Economists use the aggregate supply and aggregate demand model to explain how short run fluctuations in the business cycle impact the price level and level of output in an economy.

Answer and Explanation:

1. a. aggregate demand shifts right. The rise in stock prices makes actors in the economy feel wealthier and as a result, they consume more. This causes an increase in aggregate demand.

2. a. both the price level and real GDP rise. When the aggregate demand curve shifts right, it puts upward pressure on both the price level and level of output. Assuming the other curves (SRAS and LRAS) remain where they are, the economy would now be facing an inflationary gap.

3. d. short-run aggregate supply left. The key phrase in the scenario is "stay high for some time." As people begin to expect the price level to remain high, they will negotiate higher salaries. This would increase the costs of production and shift the short-run aggregate supply curve to the left.


Learn more about this topic:

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Aggregate Supply and Aggregate Demand (AS-AD) Model

from Economics 102: Macroeconomics

Chapter 7 / Lesson 3
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