Econ 105 Intro To Economics: The Aggregate Demand Sh

Econ 105 Intro To Economics1 Asketch The Aggregate Demand Short Run

Describe the aggregate demand, short-run aggregate supply, and long-run aggregate supply in an economy at long-run equilibrium. Explain how a dollar appreciation against other currencies impacts imports into the United States and exports from the U.S. Additionally, analyze how dollar appreciation affects aggregate demand (AD), short-run aggregate supply (SAS), and long-run aggregate supply (LRAS). Include the short-run effects on the graph in part A, detailing changes in real GDP and the price level. Discuss the classical view of the AS-AD model in the long run, focusing on how real GDP and the price level change without any technological, capital, or labor input increases. Finally, interpret these changes with appropriate graphical analysis.

Paper For Above instruction

The aggregate demand (AD), short-run aggregate supply (SAS), and long-run aggregate supply (LRAS) frameworks are fundamental tools in macroeconomics for analyzing fluctuations in economic output and price levels. In an economy at long-run equilibrium, the aggregate demand curve intersects both the short-run and long-run aggregate supply curves at the same point, signifying that the economy is producing at its full potential, with no inflationary or recessionary gaps. The LRAS is vertical at the economy’s natural level of output, reflecting the idea that, in the long run, output is determined by factors such as technology, capital stock, and labor, rather than the price level. The AD curve slopes downward, indicating that an increase in the price level leads to a decrease in the quantity of goods and services demanded.

The impact of an appreciation of the U.S. dollar against other currencies significantly influences trade balances by making imports cheaper for U.S. consumers and raising the price of exports for foreign buyers. When the dollar appreciates, U.S. imports tend to increase because foreign goods become less expensive relative to domestic goods. Conversely, U.S. exports tend to decline because American goods are more expensive for foreign consumers. This shift results in a movement along the aggregate demand curve, typically leading to a decrease in aggregate demand, as net exports—exports minus imports—diminish. This decline in AD causes real GDP in the short run to contract, and the price level may also decrease due to lower demand pressures.

Graphical Analysis of Currency Appreciation

In the graph from part A, an appreciation of the dollar shifts the aggregate demand curve (AD) inward (to the left). Short-run aggregate supply (SAS) and long-run aggregate supply (LRAS) are initially unaffected by currency fluctuations. As AD shifts leftward, real GDP decreases below its full-employment level, resulting in a recessionary gap. Prices may decrease slightly as demand diminishes; however, in the short run, prices are somewhat sticky, and the primary effect is a reduction in output and employment. This demonstrates how currency appreciation can lead to economic slowdown, highlighting the importance of international currency markets on domestic macroeconomic conditions.

From a classical long-run perspective, without changes in technology, capital, or labor input, the economy’s output remains at its natural level, as shown by the vertical LRAS curve. The long-run effects of sustained currency appreciation are primarily reflected in the price level. As aggregate demand declines, the economy moves along the short-run aggregate supply curve to a point where the price level falls, restoring the natural level of output in the long run. The LRAS remains unchanged, but overall prices are adjusted downward to accommodate reduced demand, illustrating that the economy's productive capacity remains intact, but the price level adjusts to new equilibrium conditions.

This analysis underscores the interconnectedness of currency exchange rates, trade balances, and macroeconomic equilibrium. Appreciation of the dollar can depress economic output in the short run, influencing employment and income levels, but in the long run, the economy's potential output remains unaffected, with adjustments mainly reflected in price levels. Policymakers must consider these dynamics when designing strategies to stabilize the economy, especially in a globalized trade environment where currency fluctuations can have significant ripple effects on economic stability.

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