Fully Answer The Assigned Questions In Narrative Thir 066623

Fully Answer The Assigned Questions In Narrative Third Person Format

The assignment requires a comprehensive essay in narrative third person format, addressing several key macroeconomic topics related to aggregate demand (AD), aggregate supply (AS), economic gaps, and the business cycle. The paper must be approximately 1200 words, based on at least three scholarly sources, and formatted according to APA guidelines.

Paper For Above instruction

In macroeconomics, understanding the dynamics of aggregate demand and supply is crucial for analyzing economic fluctuations and policy impacts. The following discussion systematically explores the reasons behind the shape of the AD and AS curves, the implications of resource discoveries, economic gaps, and different economic theories, as well as the effects of policy shocks, supported by scholarly sources and current economic data.

1. Reasons Why the Aggregate Demand Curve is Negatively Sloped

The aggregate demand (AD) curve is negatively sloped due to three primary reasons, each rooted in how the determinants of AD influence the overall price level and output. First, the wealth effect explains that as the price level decreases, consumers' real wealth increases, encouraging greater consumption. Conversely, higher price levels diminish real wealth, leading to reduced consumption (Mankiw, 2018). Second, the interest rate effect posits that when the price level rises, consumers and firms require more money for transactions, increasing interest rates. Higher interest rates discourage borrowing and investment, decreasing overall demand. Third, the exchange rate effect indicates that a higher domestic price level causes the country's goods to become relatively more expensive internationally, reducing exports and increasing imports, which collectively decrease net exports. These effects are influenced by the determinants of AD: consumer confidence, investment levels, government spending, and net exports (Blanchard & Johnson, 2013). Each of these determinants interacts with the price level, reinforcing the downward slope of the AD curve.

2. Reasons Why the Aggregate Supply Curve is Positively Sloped

The aggregate supply (AS) curve exhibits a positive slope for two main reasons. First, in the short run, some prices, notably wages and input costs, are sticky or slow to adjust. When the overall price level rises, firms find it profitable to increase production because their output prices increase faster than input costs, leading to higher profits and output levels (Mankiw, 2018). Second, the positive slope can be attributed to the technological and resource constraints faced by firms: higher prices incentivize firms to utilize more of their existing resources, hire additional labor, or employ advanced production techniques, thereby increasing output. These reasons are influenced by the determinants of AS, including resource prices, technological innovations, and labor productivity (Blanchard & Johnson, 2013). As input costs remain fixed or sticky in the short run, higher prices translate into increased production, contributing to the upward-sloping nature of the short-run AS curve.

3. Impact of Discovering a Large Oil Reserve in South Dakota on AS Curve

The discovery of a large oil reserve in South Dakota would primarily affect the aggregate supply (AS) curve in both the long run and the short run. In the short run, the sudden increase in available resources can lower input costs, especially for energy, allowing firms to produce more at existing price levels, which shifts the short-run AS curve to the right. Over the long term, the increased resource endowment enhances the productive capacity of the economy, shifting the long-run AS curve outward. Thus, a substantial resource discovery effectively improves the economy’s overall capacity to produce goods and services, leading to sustained economic growth in both the short run and the long run (Mankiw, 2018).

4. Recessionary Gap and Causes

(a) A recessionary gap refers to the situation where actual GDP is less than potential GDP, indicating underutilized resources and unemployment above the natural rate. This gap results from insufficient demand, where aggregate demand falls short of aggregate supply at the full employment level (Blanchard & Johnson, 2013).

(b) The two main causes of a recessionary gap include a decrease in consumer confidence and a decline in investment. A decline in consumer confidence reduces consumption expenditure, decreasing aggregate demand, which causes firms to cut back production and lay off workers, increasing unemployment. Similarly, a drop in investment by firms reduces capital formation and aggregate demand, leading to a similar rise in unemployment. Both causes ultimately diminish the overall demand in the economy, creating a gap below potential output.

5. Short-Run and Long-Run AS Curves in Classical and Keynesian Models

The classical and Keynesian models differ significantly in their depiction of short-run and long-run aggregate supply curves. In the classical model, the short-run AS curve is vertical at the full employment level because wages and prices are assumed flexible, ensuring that the economy always operates at full capacity. Over the long run, the AS curve remains vertical, reflecting an economy’s vertical potential output determined by resources and technology (Mankiw, 2018). Conversely, the Keynesian model posits that in the short run, the AS curve is horizontal or flat at low levels of output, where excess capacity and unemployment are prevalent, thus emphasizing demand-side influences. Over the long run, the Keynesian AS curve becomes vertical at full employment, similar to the classical view; however, the path to this equilibrium can involve persistent disequilibrium and sticky wages and prices (Blanchard & Johnson, 2013). The differing shapes arise from their core assumptions about price and wage flexibility, with Keynes emphasizing demand and flexibility constraints, while classical models assume full flexibility in prices and wages, ensuring the economy always returns to potential output.

6. Effects of a Sudden Large Increase in Government Spending Due to War

(a) In the classical model, a sudden increase in government spending shifts the aggregate demand curve outward, leading to higher prices and an increase in real GDP in the short run, as wages and prices are flexible, and resources are fully employed. Thus, both prices and GDP increase, with a neutral impact on unemployment due to the flexibility assumption. (Mankiw, 2018).

(b) In contrast, the Keynesian model predicts that an increase in government spending raises aggregate demand, leading to higher output and employment in the short run. Prices may increase slightly if the economy is near full capacity, but the primary effect is growth in real GDP and a decrease in unemployment due to stimulus-induced demand. Prices tend to be sticky in this model, so the impact on inflation is less immediate but still upward. Overall, both models agree on increased output, but their treatment of prices and unemployment differs significantly due to underlying assumptions about price flexibility and resource utilization (Blanchard & Johnson, 2013).

7. Current Statistics and Business Cycle Phase

As of recent data, the U.S. economy exhibits moderate inflation rates around 3%, with a GDP growth rate of approximately 2.5%. These figures suggest an economy currently in the expansion phase of the business cycle. During expansion, aggregate demand is generally robust, leading to increased output and employment, with the supply curve shifting rightward over time. The slight rise in inflation indicates upward pressure on prices, consistent with increased demand and constrained supply at times. This phase is characterized by decreasing unemployment and rising consumer confidence, with current statistics reflecting a healthy, growing economy with signs of approaching the peak without yet entering a downturn or recession (Federal Reserve, 2023). The positive movements in GDP and moderate inflation suggest that the aggregate demand curve is shifting outward, while aggregate supply remains relatively stable or slowly increasing, indicative of ongoing economic expansion (Bureau of Economic Analysis, 2023).

References

• Blanchard, O., & Johnson, D. R. (2013). Macroeconomics (6th ed.). Pearson.
• Federal Reserve. (2023). Economic Data & Analysis. https://federalreserve.gov/
• Mankiw, N. G. (2018). Principles of Economics (8th ed.). Cengage Learning.