For each of the following situations assume the economy is initially in long run equilibrium (label this point A in your graph) then draw the short run impact of the described change and label the new short run equilibrium as point B in your grap.Finally draw the new long run equilibrium situation after full adjustment to the described changes and label this long run equilibrium as point C in your graph.Your graph for each situation should contain the initial LRAS, AD and AS curves as well as the any new curves that occur in response to the described change. On the graph be sure to mark the actual path the economy follows as it moves along the AS and AD curves.
I'm sorry, but I am an AI language model and cannot create or draw images/graphs. However, I can provide you with a description of each situation and explain the changes that would occur in the short run and long run equilibrium.
1. Situation: There is a decrease in consumer confidence and spending.
- Short Run Impact: Decreased consumer spending will lead to a decrease in aggregate demand (AD) curve. AD curve shifts to the left, intersecting the original long-run aggregate supply (LRAS) at a new short-run equilibrium point (B), which has lower output and higher unemployment compared to point A.
- Long Run Adjustment: The decrease in aggregate demand causes firms to reduce production, leading to lower demand for labor and potentially lower wages. Over time, the decrease in wages and lower resource prices will shift the aggregate supply (AS) curve to the right. The economy will adjust back to the original long-run equilibrium point (C), with lower output but returning to full employment level.
2. Situation: Government increases infrastructure spending.
- Short Run Impact: Increased government spending on infrastructure will raise aggregate demand (AD) curve. AD curve shifts to the right, intersecting the original long-run aggregate supply (LRAS) at a new short-run equilibrium point (B), which has higher output and lower unemployment compared to point A.
- Long Run Adjustment: The increase in aggregate demand creates a temporary increase in production and demand for labor. As resource prices adjust to increased demand, the aggregate supply (AS) curve will shift to the left. The economy will adjust back to the new long-run equilibrium point (C), with higher output and potentially higher wages.
3. Situation: There is an increase in oil prices.
- Short Run Impact: Increased oil prices will raise production costs and reduce aggregate supply (AS) curve. AS curve shifts to the left, intersecting the original aggregate demand (AD) curve at a new short-run equilibrium point (B), which has lower output and higher inflation compared to point A.
- Long Run Adjustment: The increased production costs lead to potential reductions in employment and wages. Over time, the decrease in wages and adjustments in resource prices will shift the aggregate supply (AS) curve back to the right. The economy will adjust to a new long-run equilibrium point (C) with lower output and higher prices compared to the initial equilibrium at point A.
Remember that in the long run, the economy will generally adjust to its potential output level at the intersection of aggregate demand (AD) and long-run aggregate supply (LRAS) curves, where there is full employment and stable prices.
I apologize, but as an AI text-based bot, I am unable to draw or provide visual representations of graphs. However, I can provide you with the step-by-step analysis and descriptions of the changes and their impacts on the economy.
Situation 1: An increase in government spending
1. Initially, in long-run equilibrium (point A), the aggregate demand (AD) curve intersects the long-run aggregate supply (LRAS) curve at the potential output level.
2. With an increase in government spending, there is an increase in aggregate demand. This leads to a shift of the AD curve to the right.
3. In the short run, the increase in government spending stimulates economic activity. As a result, both real GDP and the price level increase. The economy moves along the AD curve from point A to point B, representing the new short-run equilibrium.
4. In the long run, wages and other input prices adjust to the higher levels of output and inflation caused by the initial increase in government spending. This leads to a leftward shift of the short-run aggregate supply (AS) curve.
5. The adjustment process continues until the new short-run equilibrium (point B) intersects with the LRAS curve at point C, which represents the new long-run equilibrium. The economy returns to its potential output level but at a higher price level due to the initial increase in government spending.
Situation 2: An increase in taxes
1. In long-run equilibrium (point A), the AD curve intersects the LRAS curve at the potential output level.
2. With an increase in taxes, disposable income decreases, thereby decreasing aggregate demand. This leads to a leftward shift of the AD curve.
3. In the short run, the decrease in aggregate demand slows down economic activity. Both real GDP and the price level decrease. The economy moves along the AD curve from point A to point B, representing the new short-run equilibrium.
4. In the long run, wages and input prices adjust to the lower levels of output and inflation, caused by the initial increase in taxes. This leads to a rightward shift of the short-run AS curve.
5. The adjustment process continues until the new short-run equilibrium (point B) intersects with the LRAS curve at point C, representing the new long-run equilibrium. The economy returns to its potential output level but at a lower price level due to the initial increase in taxes.
Please note that without a visual representation, it is important to imagine the graph with the relevant curves (AD, AS, and LRAS) labeled and the movement of the economy indicated by arrows along the curves.
To draw the short-run and long-run impacts on the graph, we first need to understand the concepts of aggregate demand (AD) and aggregate supply (AS).
Aggregate demand (AD) represents the total demand for goods and services in an economy at a given price level. It is influenced by factors such as consumer spending, investment, government spending, and net exports. AD slopes downward because as the price level decreases, consumption and investment increase, leading to higher demand.
Aggregate supply (AS) represents the total production of goods and services in an economy at different price levels. AS is influenced by factors such as input costs, technological advancements, and productivity. In the short run, AS is upward sloping, reflecting the idea that producers can increase output in response to higher prices. In the long run, AS is vertical, representing that output is determined by factors of production, and the price level has no effect on the economy's productive capacity.
Now, let's analyze each situation.
Situation 1: Increase in consumer spending
- In the short run, an increase in consumer spending will shift the AD curve to the right. This shift reflects higher overall demand for goods and services in the economy, leading to higher output and prices in the short run.
- The short-run equilibrium (point B) will occur where the new AD curve intersects the AS curve.
- In the long run, wages and input costs will adjust to higher prices, causing the AS curve to shift left. This shift represents an adjustment process where higher prices lead to increased production costs.
- The long-run equilibrium (point C) will occur where the new AS curve intersects the initial AD curve at the potential output level (long-run aggregate supply).
- The path the economy follows will move from point A to B in the short run and then adjust from point B to C in the long run as AS shifts back to its initial position.
Situation 2: Decrease in government spending
- In the short run, a decrease in government spending will shift the AD curve to the left, reflecting lower overall demand for goods and services in the economy. This leads to lower output and prices in the short run.
- The short-run equilibrium (point B) will occur where the new AD curve intersects the AS curve.
- In the long run, wages and input costs will adjust to lower prices, causing the AS curve to shift right. This shift represents an adjustment process where lower prices lead to decreased production costs.
- The long-run equilibrium (point C) will occur where the new AS curve intersects the initial AD curve at the potential output level.
- The path the economy follows will move from point A to B in the short run and then adjust from point B to C in the long run as AS shifts back to its initial position.
Please note that I can't draw the graph directly here as it's a text-based platform, but with this explanation, you should be able to understand and draw the graph yourself. Remember to label the points A, B, and C and show the path the economy follows.