What happens if the economy is at its long-run equilibrium and aggregate demand increases?
What will be an ideal response?
The increase in aggregate demand means that the AD curve shifts rightward. Initially short-run aggregate supply does not change, so the SAS curve remains stationary. As a result, the price level rises and real GDP increases. The economy is an above-full-employment equilibrium. Eventually, however, the tight labor market leads to a rise in the money wage rate. When the money wage rate rises, short-run aggregate supply decreases and the SAS curve shifts leftward. The price level rises and real GDP decreases. In the long run, the short-run aggregate supply decreases so that real GDP returns to potential level of GDP and the only effect is that the price level is permanently higher.
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While many analysts defended the actions taken by the Fed and the Treasury to respond to the financial crisis in 2008, others were critical of these actions. The critics were concerned that by not allowing large firms to fail
A) stockholders and bondholders of these firms were not allowed to receive the proceeds from the sale of assets that would have occurred if the firms had declared bankruptcy. B) there is an increased likelihood that other firms will engage in risky behavior in the future with the expectation that they will also not be allowed to fail. C) there will be less competition in the U.S. economy, which could led to higher prices for consumers. D) smaller firms will resent not receiving similar assistance.
Suppose you own a small business. Last month, your total revenue was $6,000. In addition, you paid: $1,000 in monthly rent for office space,$200 in monthly rent for equipment,$3,000 to your workers in wages for the month, and$1,000 for the supplies you used that month. If you correctly determine that your economic profit last month was negative $200, then it must be true that:
A. your implicit costs are $200 per month. B. you do not have any implicit costs. C. the rent you pay on your equipment is an implicit cost. D. your implicit costs are $1,000 per month.