MacroEconomics 10.3 Long-Run Equilibrium and the Price Level
If economic growth causes the long-run aggregate supply curve to shift rightward over time, but the aggregate demand curve does not change, we expect
the long-run equilibrium price to decline, and there will be secular deflation.
The long-run equilibrium of an economy occurs
where the long-run aggregate supply curve meets the aggregate demand curve.
An increase in the U.S. price level can be caused by all of the following except
worsening economic conditions in Asia.
Consider the accompanying diagram when answering the questions that follow. Suppose that the current price level is Upper P3. In this case, the price will rise toward Upper P1 because
All of the above.
In Ciudad Barrios, El Salvador, the latest payments from relatives working in the United States have finally arrived. When the credit unions open for business, up to 150 people are already waiting in line. After receiving the funds their relatives have transmitted to these institutions, customers go off to outdoor markets to stock up on food or clothing or to appliance stores to purchase new stereos or televisions. Similar scenes occur throughout the developing world, as each year migrants working in higher-income, developed nations send around $200 billion of their earnings back to their relatives in less developed nations. Evidence indicates that the relatives, such as those in Ciudad Barrios, typically spend nearly all of the funds on current consumption. The equilibrium price levels in nations that are recipients of large inflows of funds from migrants will likely
Based on the above information, developing countries' income inflows transmitted by migrant workers are primarily affecting their economies' long-run aggregate demand curves. rise because there is an increase in the aggregate demand in these countries.
If the LRAS shifts to the right over time and during this time AD does not noticeably change, real GDP will ________ and the price level will ________.
Increase; decrease.
Identify the combined shifts in long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of an increase in equilibrium real GDP and increase in the equilibrium price level. Identify the combined shifts in long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of a decrease in equilibrium real GDP with no change in the equilibrium price level. Identify the combined shifts in long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of an increase in equilibrium real GDP with no change in the equilibrium price level.
Long-run aggregate supply schedule (LRAS) shifts to the right and aggregate demand schedule (AD) shifts to the right by a larger amount. Long-run aggregate supply schedule (LRAS) shifts to the left and aggregate demand schedule (AD) shifts to the left by an equal amount. Long-run aggregate supply schedule (LRAS) shifts to the right and aggregate demand schedule (AD) shifts to the right by an equal amount.
An increase in the LRAS curve that is larger proportionately than an increase in the AD curve will lead to
a decrease in the price level and an increase in output.
Long-run equilibrium in the economy will occur
at the price level where total planned real expenditures equals real GDP at full employment.
If the actual price level increases beyond the long-run equilibrium price level, all of the following will tend to occur except
firms offering fewer services than people wish to purchase.
In the long run, persistent deflation in a growing economy can occur if
increases in the LRAS are proportionately larger than the increases in AD.
A persistent decline in the price level due to economic growth with stable aggregate demand is
secular deflation.
Suppose that the full employment level of nominal GDP rises in one year from $16.2 to $17.8 trillion. The long-run equilibrium price level, however, remains unchanged at 108. By how much (in real dollars) has the long-run aggregate supply curve shifted to the right from one year to the next? By how much, if any, has the aggregate demand curve shifted to the right?
$1.48 trillion $1.48 trillion
In the accompanying graph the equilibrium price level is ____ and the equilibrium real GDP is _____. In the accompanying graph if the price level is 140
120; $8 trillion real GDP exceeds total planned expenditures.
