ECON-1111 Chapter Notes - Chapter 15: Aggregate Supply, Liquidity Trap, Aggregate Demand

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tealelk528

10 Dec 2016

School

Vanderbilt University

Department

Economics

Course

ECON-1111

Professor

Driskill Robert

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Document Summary

Chapter 15: modern macro: from the short run to the long run. The economy may have improved but: no real wage growth, labor force participation rate is at an all-time-low, lower gdp predictions, linking the short and the long, difference between the short and the long run: Short run = period of time during which prices rarely change. Long run = prices have adapted to short run economic changes. They are both self-fulfilling prophecies: for review, when unemployment is below the natural rate. It will be hard to keep consistent workers. Wages will be raised in order to incentivize people to stay, and prices will likewise rise: when unemployment is above the natural rate, many people will want to work. Wages will be low and prices will be low so production will be low. Sras will continue to shift more downward naturally.

Related Questions

1. In economy A, all workers agree in advance on the nominal wages that their employers will pay them. In economy B, half of all workers have these nominal wage contracts. In contrast, the other half have indexed employment contracts, so their wages rise and fall automatically with the price level.

A. According to the sticky-wage theory of aggregate supply, which economy has a more steeply sloped short-run aggregate-supply curve?
B. In which economy would a 5 percent increase in the money supply have a larger impact on output in the short run?
C. In which economy would it have a larger impact on the price level in the short run?

2. When output rises, unemployment falls.

a. TRUE
b. FALSE

3. How do prices change due to an economic contraction that is caused by a shift in aggregate demand?

A. They rise in the short run and fall back to their original level in the long run.

B. They rise in the short run and rise even more in the long run.

C. They fall in the short run and rise back to their original level in the long run.

D. They fall in the short run and fall even more in the long run.

4. What happens to sales and profit during recessions?

A. sales rise and profits fall

B. profits fall and sales rise

C. sales and profits fall

D. sales and profits rise

5. Which of the following explains why production rises in most years?

A. increases in prices of goods and services

B. increases in stock prices

C. aging population

D. technological innovation

plumbutterfly691

Question:

Is it true that in a short-run production process, the marginal cost curve eventually slopes upward because firms have to pay workers a higher wage rate as they produce more output? Explain your answer.

Answer:

According to the definition of the short-run in Investopedia, the short-run, in economics, expresses the concept that an economy behaves differently depending on the length of time it has to react to certain stimuli. The short-run does not refer to a specific duration of time but rather is unique to the firm, industry, or economic variable being studied. A key principle guiding the concept of short-run and long-run is that in the short-run, firms face both variable and fixed costs, which means that output, wages and prices do not have full freedom to reach a new equilibrium. Most businesses make decisions not only about how many workers to employ at any given point in time (i.e. the amount of labor) but also about what scale of an operation (i.e. size of factory, office, etc.) to put together and what production processes to use. In contrast, economists often define the short-run as the time horizon over which the scale of operation is fixed and the only available business decision is the number of workers to employ. Technically, the short-run could also represent a situation where the amount of labor is fixed and the amount of capital is variable, but this is fairly uncommon. The logic is that even taking various labor laws as given, it's usually easier to hire and fire workers than it is to significantly change a major production process or move to a new size of factory or office. In the short-run, one factor of production is fixed, e.g. capital. This means that if a firm wants to increase output, it could employ more workers, but not increase capital in the short-run (it takes time to expand.) Therefore in the short-run, we can get diminishing marginal returns, and marginal costs may start to increase quickly. Also, in the short-run, we can see prices and wages out of equilibrium, e.g. sudden rise in demand, may lead to higher prices, but firms don't have the capacity to respond and increase supply.

Tejvan Pettinger. (2015). Short-run, long-run, very long-run. Glossary Terms. Economics help blog. NY: Helping to Simplify Economic.
Retrieved from: http://www.economicshelp.org/blog/glossary/short-run-long-run-very-long-run/
Short-Run. Short-Run Definition | Investopedia
Retrieved from http://www.investopedia.com/terms/s/shortrun.asp#ixzz4KO1YXsri

I need a peer reply for this, please.

taupeswan96

2. If workers become more productive, which of the following would happen in the labor market?

a. Labor supply would increase.

b. Labor supply would decrease.

c.Labor demand would increase and labor supply would decrease.

d.Labor demand would decrease and so would labor supply.

5.Since a long run consists of many short runs, the classical model is

a. incorrect every time we look at output data

b.accurate during the short run

c. paradoxically quite accurate in the long run; however, it is not very accurate in the short run

d. our best guide to fluctuations in the economy

e. paradoxically quite accurate in the short run; however, it is not very accurate in the long run

18.The difference between the number of workers employed if the economy was operating at full employment and the number of workers currently employed given aggregate expenditures is known as

a. cyclical unemployment

b. frictional unemployment

c. structural unemployment

d. unemployment is not possible in the short run macro model

22. From the perspective of the classical model, many economists would NOT consider one of these to be an automatic de-stabilizer

a. Stock prices

b. Wealth

c. Housing prices

d. Investment spending

e. None of the above

25. We expect a rise in transfer payments when

a. the needs of the poor receive more publicity

b. taxes rise

c. GDP rises and inflation soars

d. the retirement age remains unchanged over time

e. recessions occur

rosecheetah455

ECON-1111 Chapter Notes - Chapter 15: Aggregate Supply, Liquidity Trap, Aggregate Demand

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