Aggregate Supply and Demand For this question, specify what happens in the money
ID: 1223270 • Letter: A
Question
Aggregate Supply and Demand
For this question, specify what happens in the money market, goods market, and labor market when appropriate. (use IS-LM diagrams and AS-AD diagrams when necessary).
a) Explain using graphs and words why and how the AS curve shifts in the short run (when expected price level is fixed) and medium run (when expected price level is equal to the equilibrium price level) if there is an increase in markups.
b) Explain using graphs and words why and how the AS curve shifts in the short and medium run if there is an increase in unemployment benefits.
Explanation / Answer
Ans a)AS curve shifts to the left. For the short run, expected price level is fxed. Higher markup causes higher prices for any level of output. Then because expected price level gradually adjusts upward, workers ask for a higher nominal wage, which further increases price level. So, in the medium run, AS curve shifts further to the left
ans b)The AS curve shifts to the left. An increase in unemployment benefts increases wages and hence prices in the short run, shifting the AS curve to the left. In the medium run, the same adjustment as in above question happens, shifting the AS curve further to the left