Hey Guys! I need some help with my econ homework, if you could expain how you go
ID: 1199916 • Letter: H
Question
Hey Guys! I need some help with my econ homework, if you could expain how you got the answer that would be awesome!
Thanks in advance!
The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural rate of output of $600 billion. Suppose firms become pessimistic about future business conditions and cut back on investment spending Shift the short-run aggregate supply (AS) curve or the short-run aggregate demand (AD) curve to show the short-run impact of the business pessimism 240 AS 200 AD 160 AS 120 80 AD1 40 D2 0 200 400 600 800 1000 200 OUTPUT (Billions of dollars)Explanation / Answer
1. With a pessimism spread in the economy and investment cutting back, the aggregate demand curve would shift to left as investment is a component of aggregate demand. AD = C+I+G+net exports. Lower investment implies lower demand.
2. FALL BELOW
The supply exceeds the demand at each price due to lower demand, which drives the prices down.
3. FALL BELOW
If the demand is reduced in the economy, the firms are not willing to invest more and hence the output would fall.
4. INCREASE
Obviously, if the firms are cutting back on their production due to unsold pile of stocks, they would also be laying-off workers, creating unemployment in the economy.
5. START RISING and AD curve, RIGHT.
When recovering back and optimism gaining grounds in the economy, the price expectations would start rising and the aggregate demand curve would shift to right to restore equilibrium.