Describe the characteristics of the short-run aggregate supply curve. Explain what happens to: (1) nominal wages; (2) employment; (3) output; (4) revenues; and, (5) profits as the price level increases from the full-employment level of output. Then explain what happens to these variables as the price level decreases from the full-employment-level of output.
What will be an ideal response?
The short-run aggregate supply curve will be an up sloping curve with the price level on the vertical axis and real domestic output on the horizontal axis. The initial level of output will be the full-employment level of output.
As the price level increases from the full-employment level of output, revenues to the firm increase because nominal wages are fixed, and the profits for firms will rise. Firms will have an incentive to increase output and employment (hiring temporary or part-time workers or paying for overtime), so real GDP will increase and unemployment will fall below its natural rate.
As the price level decreases from the full-employment level of output, revenues to the firm decrease and because nominal wages are fixed, the profits for firms will decrease. Firms will have an incentive to decrease output and employment, so real GDP will decrease and employment will fall below its natural rate.
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What will be an ideal response?
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What will be an ideal response?
Assume that we want to drive our economy out of recession by generating a $400 billion change in real GDP. The MPC is 0.80. Which of the following policy prescriptions would generate the targeted $400 billion change in income?
A. $120 billion increase in government spending and $50 billion increase in tax revenue. B. $140 billion increase in government spending and $70 billion increase in tax revenue. C. $160 billion increase in government spending and $120 billion increase in tax revenue. D. $220 billion increase in government spending and $100 billion increase in tax revenue.