Economics

Economics

Answer a

P = 100

Q or Y = 1000

It is a perfect equilibrium condition where the price and the quantity is equal.

If in the short run, where the price is sticky, and SRAS is horizontal, whereas in the long run the P and Y are variable therefore in the short run there is no much effect on the price and the quantity, i.e. P and Y. as the price is sticky and SRAS is horizontal so in the short run the Y will be effected. But in the long run when the price and the quantity is different or variable and LRAS (long run aggregate supply) is vertical therefore,

Short run

Aggregate demand = P * Y

As Y = 800, but price remains sticky because the SRAS is horizontal and price is sticky while the Y changes.

The Y will change as the aggregate demand = 800, Y will go down to 800. Thus for the short run, the total output Y is 800 and the price will increase from 100 to 115.

Long run

As in the long run the price and the quantity changes, both are variables as the aggregate demand curve shifts towards left, the variable P and Y also changes and shifts towards left. While as far as the long run is concerned, the total output will be 1000 and price will be back to its original equilibrium position and price will also get back to the original equilibrium as AD is constant in the long run.

Answer b)

Liberal economist would say that increasing the government expenditure will bring the demand back to the old level, so the liberal economist would be thinking about increasing the G, while on the other hand, the conservative economist would simply wait for the market mechanism to automatically self correct the market and let the “invisible hand” bring the market back into the equilibrium.

100*1000 =10000

Answer c)

How Expansionary Monetary Policy Works

Expansionary Monetary policy is used for the purpose of increase in money supply that can be done by combining following three things:

Securities are purchased in open market, which is called Open Market Operations.

Federal Discount Rate gets lesser.

Reserve Requirement gets lesser.

The combination of these creates a direct effect on the interest rate. The price of securities rises when the securities in open market were bought by the Fed (Gali, 2009). Central bank uses several methods of expansionary monetary policy, such as decreasing reserve requirements ...