# Quiz 35: Financial Economics

In the short run, we will stay on the same aggregate supply curve. Thus, if the price level goes from 120 to 130 in the economy, we see that this will cause real output to shift from $870 to $890, since at a price level of 130 and staying on AS^{2} , the real output will be $890. Thus, real output increases by $20.
In the long run, the economy will eventually shift back to the full employment level of output, which is given to be $870. Therefore, in the long run, output will decrease by $20 back to the $870 potential output level.
If the price level fell from 120 to 110, in the short run, the economy will stay on the same aggregate supply curve, AS^{2}. Therefore, we see that on AS^{2} , a price level of 110 corresponds to a real output of $850. Thus, real output falls from $870 to $850 in the short run, when the price level falls from 120 to 110. This is a fall of $20.
In the long run, the economy will eventually move back to the full employment level of output, which is given to be $870. Therefore, in the long run, output will increase again by $20 to go back to the $870 potential output level.
With every price level, the long run real output will be the economy's potential level of output, which is given to be $870. Thus, the long run level of output at each of the three price levels is $870.

In macroeconomics, the short run is a period in which nominal wages do not respond to changes in the price level. The long run is a period in which nominal wages fully responds to changes in the price level. In other words in short run input prices are inflexible or even perfectly inflexible whereas in the long run the input prices are fully flexible. The distinction is important because the differences in the assumption about the flexibility of input prices lead to large differences in the shape and position of the aggregate supply curve.

^{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 120 to 132 By how much will Q increase in therun due to the price level increase

We are given that the equation for a short run AS curve is
. If the price level, or P , iS^{1}20, then we have:
.
To find Q , we simply subtract both sides by 20 and divide both sides by.5, and we get:
We can solve for how much Q would be if P went up to 132 by substituting 132 for P :
.
To find Q , we simply subtract both sides by 20 and divide both sides by.5, and we get:
Thus, we see that in the short run, Q will increase by 24 (from 200 to 224).
In the long run, Q will revert back to the full-employment level of output. We are given that the Q in the first part
is the full-employment level of output. Therefore, Q will fall back to the full employment output of $200 in the long run. In other words, Q will increase in the long run by -$24.

^{1}00. Use the short-run aggregate supply schedules below to answer the questions that follow:What will be the level of real output in the short run if the price level unexpectedly rises from 100 to 125 because of an increase in aggregate demand What if the price level unexpectedly falls from 100 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 therun when the price level rises from 100 to 125 When it falls from 100 to 75 Explain each situation. c. Show the circumstances described in parts a and b on graph paper, and derive theaggregate supply curve.

^{2}009, the U.S. price level rose by about 64 percent while real output increased by about 62 percent. Use the aggregate demand-aggregate supply model to illustrate these outcomes graphically.

There is no answer for this question

^{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