Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is an increase in wealth
What will be an ideal response?
Before the increase in demand, the economy begins at point A with GDP at Y1. The increase in wealth shifts the aggregate demand curve to the right from AD2 to AD1. As a result, prices rise and output increases. Unemployment also falls as the economy rises above potential GDP (point D). The growing economy causes workers and firms to adjust their expectations about wages and prices upward. As wages and prices rise, this will shift the short-run aggregate supply curve to the left. Eventually, the economy moves to point C, with real GDP restored back to potential GDP at Y1 and prices even higher. The unemployment rate goes back to the natural level.
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The marginal rate of substitution is
A) the rate at which the consumer will give up one good to get an additional unit of another good while remaining on the same indifference curve. B) the rate at which utility increases as the consumer increases purchases of a good, holding purchases of the other good constant. C) the rate at which a consumer will exchange a good for income holding prices constant. D) None of the above answers is correct.
What has been the average growth rate of U.S. real GDP per person over the past 100 years? In which periods was growth most rapid and in which periods was it slowest?
What will be an ideal response?