Consider An Economy With The Following Aggregate Demand

4consider An Economy With The Following Aggregate Demand Ad And Sho

Consider an economy with the following aggregate demand (AD) and short-run aggregate supply (SRAS) schedules. Decision-makers have previously made decisions anticipating that the price level during the current period will be P105.

a. Indicate the quantity of GDP that will be produced during the period.

b. Is it a long-run equilibrium level of GDP? Why or why not?

c. How will the unemployment rate during the current period compare with the natural rate of unemployment?

d. Will the current rate of GDP be sustainable into the future? Why or why not?

Paper For Above instruction

The scenario described involves analyzing the short-term economic equilibrium based on aggregate demand (AD) and short-run aggregate supply (SRAS) within a given macroeconomic framework. Making predictions about the output level, employment, and long-term sustainability requires understanding the relationships among these macroeconomic indicators and the implications of decision-makers’ expectations.

Firstly, the question indicates that the decision-makers have based their expectations on a price level of P105. This implies that their expectations influence their behavior, investments, and pricing strategies. Given the AD and SRAS schedules, the equilibrium quantity of GDP during this period will be where the aggregate demand curve intersects the short-run aggregate supply curve at the anticipated price level (P105). If the intersection point occurs at a certain level of real GDP, that is the quantity that will be produced during this period. In this context, since the decision-makers’ expectations are set at P105, and assuming the actual AD and SRAS curves intersect at this price level, the equilibrium GDP is determined by the intersection point of these curves at P105.

Next, determining whether this point is a long-run equilibrium involves understanding the concept of potential or natural level of GDP. In the long run, economy tends to operate at its potential output, where the aggregate demand equals the long-run aggregate supply (LRAS) at the natural rate of unemployment. If the equilibrium GDP coincides with the level where LRAS intersects AD at P105, then the economy is in long-run equilibrium. However, if the equilibrium GDP is above or below the potential output, then the economy is not in long-term equilibrium. Usually, in short-run scenarios, if the actual output deviates from the potential output, it indicates either an inflationary or recessionary gap. Therefore, unless specified otherwise, the equilibrium level of GDP at P105, which results from the intersection of AD and SRAS, might not necessarily be the same as the natural level, thus indicating a deviation from long-run equilibrium.

Regarding unemployment, the natural rate of unemployment reflects the level of unemployment when the economy operates at its potential output. If the current equilibrium GDP exceeds the potential GDP, it suggests that the economy is overheating, and unemployment rates would be lower than the natural rate due to labor market tightness. Conversely, if the equilibrium GDP is below the natural level, unemployment would be higher than natural, indicating a recessionary gap. Given decision-makers’ expectations and the potential misalignment between actual and natural GDP, the current unemployment rate likely differs from the natural rate. Since the situation is based on expectations rather than actual outcomes, it is probable that the unemployment rate in this period is not equal to the natural rate of unemployment.

Finally, regarding sustainability, if actual GDP is above potential GDP, the economy might experience upward pressure on prices, leading to inflation in the future, which is unsustainable if not corrected. Alternatively, if the current output is below the potential, it signals underutilization of resources, and the economy might recover over time. The sustainability depends on whether the current equilibrium can be maintained without leading to inflationary or recessionary pressures. Given that decision-makers are operating with expectations at P105, and unless adjustments are made, this rate of GDP might not be sustainable into the future without structural changes or policy interventions.

References

• Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning.
• Krugman, P., & Wells, R. (2020). Macroeconomics (6th ed.). Worth Publishers.
• Blanchard, O., & Johnson, D. R. (2013). Macroeconomics (6th ed.). Pearson.
• Froyen, R. T. (2019). Macroeconomics: Theories and Policies (10th ed.). Pearson.
• Parkin, M., & Bade, R. (2019). Macroeconomics (13th ed.). Pearson.
• Layard, R., Nickell, S., & Jackman, R. (2005). Unemployment: Questions and Answers. Oxford University Press.
• Barro, R. J. (2020). Macroeconomics (8th ed.). MIT Press.
• Fisher, I. (1933). The debt-deflation theory of great depressions. Econometrica, 1(4), 337-357.
• Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.). McGraw-Hill Education.
• Ross, S., Westerfield, R., & Jordan, B. (2019). Essentials of Corporate Finance (10th ed.). McGraw-Hill Education.