GETTING TO FULL EMPLOYMENT: PART ONE
Along the aggregate demand curve (AD), what is true about spending and income?
- They are equal.
Why does the AD curve have a negative slope?
- A lower price level increases the real value of nominal assets, which in turn causes people to increase real spending.
Can there be too much employment?
- Yes, when a shortage of workers forces wages and prices up.
Where will output always be in the long run?
- At its full-employment level (FE).
If an economy is producing less than its full-employment level of output, what will happen to wages and prices? How will this bring the economy back to full employment?
- Wages and prices will fall, shifting the AS curve to the right.
If an economy is producing more than its full-employment level of output, what will happen to wages and prices? How will this bring the economy back to full employment?
- Wages and prices will rise, shifting the AS curve to the left.
How will prices change when the economy is underemployed?
- Prices will fall
Assume for the next 3 questions that the economy is at full employment and then the following event occurs, and that the government doesn’t aid the economy’s return to full employment.
In 1981-82, the
- In the short run, output and prices fell. In the long run, output returned to its full-employment level as prices fell further.
In the 1960s, the
- In the short run, output and prices rose. In the long run, output fell back to its full-employment level as prices rose further.
In the mid 1970s, high oil prices shifted the aggregate supply curve to the left. Describe what happened and how the economy recovered.
- In the long run, output rose back to its full-employment level as prices fell back to their original level.
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