## Quiz 18 :

Extending the Analysis of Aggregate Supply

Answer:

Laffer curve illustrates the relationship between tax rate and tax revenue. It points out that an economy has an optimal tax rate that maximizes tax revenue. Tax rates that are above or below the optimal tax rate reduce tax revenue.

Supply-side economics pointed out that level of inflation is determined largely by the change in aggregate supply. Government tax policies can affect the shifts of the short-run and long run aggregate supply curves, which will consequently affect inflation, unemployment, and output.

Determining the economy's location on the curve helps identifying if the current tax rate is below or above the optimal tax rate. If it is below the optimal tax rate, government should increase tax rate; and if it is above the optimal tax rate, government should decrease tax rate.

_{1}20 to 130. By how much will real output increase in the short run? In the long-run? Instead, now assume that the price level dropped froM

_{1}20 to 110. Assuming flexible product and resource prices, by how much will real output fall in the short run? In the long run? What is the long-run level of output at each of the three price levels shown?

Answer:

The figure of the question is reproduced below.

In the short run, the economy moves along AS_{2}. When price increases froM_{1}20 to 130, output increases from $870 to $890.

In the long run, as price increases nominal wages adjust to a higher level and firms cut output back to the full-employment level of $870. Aggregate supply curve shifts leftward to AS_{3}.

In the short run, the economy moves along AS_{2}. When price decreases froM_{1}20 to 110, output decreases from $870 to $850.

In the long run, as price decreases nominal wages adjust to a lower level and firms increase output back to the full-employment level of $870. Aggregate supply curve shifts rightward to AS_{1}.

The long-run level of output is the full-employment level, which is $870.

Answer:

Graphically the Phillips Curve shifted upward, since inflation changed by a larger amount for 1 percentage change of unemployment. Graph 1.1 below shows the change of Phillips Curve from PC 1 to PC 2.

Graph 1.1: Phillips curve

From Graph 1.1, observe that initially the gap between the inflation and unemployment iS_{1}% and after the years, it waS_{3}%. This led to the difference between PC 1 and PC 2.

_{1}00. Use the short-run aggregate supply schedules below to answer the questions that follow: LO1 a.?What will be the level of real output in the short run if the price level unexpectedly rises froM

_{1}00 to 125 because of an increase in aggregate demand? What if the price level unexpectedly falls froM

_{1}00 to 75 because of a decrease in aggregate demand? Explain each situation, using numbers from the table. b.?What will be the level of real output in the long run when the price level rises froM

_{1}00 to 125? When it falls froM

_{1}00 to 75? Explain each situation. c.? Show the circumstances described in parts a and b on graph paper, and derive the long-run aggregate supply curve.

_{1}percent, by how much does real GDP change? Are the decreases in real GDP caused by tax increases temporary or permanent? Does the intention of a tax increase matter?

_{1}20? Suppose that the Q in your answer is the full-employment level of output. By how much will Q increase in the short run if the price level unexpectedly rises froM

_{1}20 to 132? By how much will Q increase in the long-run due to the price level increase?