The higher-than-expected price level causes firms to earn profit than they expected on each unit of output they produce, and, therefore, they their production level. At the same time, the real value of wages and other resource prices is than workers and firms expected when they signed long-term contracts. As a result, the economy as a whole produces at a level its full-employment output, and the unemployment rate is than its natural rate. Now, suppose prices remain higher than expected. As a result, in the next round of labor negotiations, unions demand and obtain higher wages for their members. The following graph shows the long-run aggregate supply curve (LRAS) at full-employment output for this economy as well as the same initial short-run aggregate supply curve as in the first graph. Shift one or both of these lines to illustrate how the economy adjusts to a new long-run equilibrium. 240 160 120 X 80 LRAS PRICE LEVEL (CPI) 200 40 0 0 3 SRAS 6 9 12 REAL GDP (Trillions of dollars) 15 18 LRAS SRAS (?)
The higher-than-expected price level causes firms to earn profit than they expected on each unit of output they produce, and, therefore, they their production level. At the same time, the real value of wages and other resource prices is than workers and firms expected when they signed long-term contracts. As a result, the economy as a whole produces at a level its full-employment output, and the unemployment rate is than its natural rate. Now, suppose prices remain higher than expected. As a result, in the next round of labor negotiations, unions demand and obtain higher wages for their members. The following graph shows the long-run aggregate supply curve (LRAS) at full-employment output for this economy as well as the same initial short-run aggregate supply curve as in the first graph. Shift one or both of these lines to illustrate how the economy adjusts to a new long-run equilibrium. 240 160 120 X 80 LRAS PRICE LEVEL (CPI) 200 40 0 0 3 SRAS 6 9 12 REAL GDP (Trillions of dollars) 15 18 LRAS SRAS (?)
Chapter14: Aggregate Demand And Supply
Section: Chapter Questions
Problem 9SQP
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Transcribed Image Text:The higher-than-expected price level causes firms to earn profit than they expected on each unit of output they produce, and, therefore,
they
their production level. At the same time, the real value of wages and other resource prices is
than workers and firms
expected when they signed long-term contracts. As a result, the economy as a whole produces at a level
its full-employment output, and
the unemployment rate is
than its natural rate.
Now, suppose prices remain higher than expected. As a result, in the next round of labor negotiations, unions demand and obtain higher wages for
their members. The following graph shows the long-run aggregate supply curve (LRAS) at full-employment output for this economy as well as the
same initial short-run aggregate supply curve as in the first graph. Shift one or both of these lines to illustrate how the economy adjusts to a new
long-run equilibrium.
240
160
120
X
80
LRAS
PRICE LEVEL (CPI)
200
40
0
0
3
SRAS
6
9
12
REAL GDP (Trillions of dollars)
15
18
LRAS
SRAS
(?)
![The following graph represents the short-run aggregate supply curve (SRAS) based on an expected price level of 120. The economy's full-
employment output level is $9 trillion.
Major unions across the country have recently negotiated three-year wage contracts with employers. The wage contracts are based on an expected
price level of 120, but the actual price level turns out to be 160. Show the short-run effect of the unexpectedly high price level by dragging the curve
or moving the point to the appropriate position.
PRICE LEVEL (CPI)
240
200
160
40
0
0
3
SRAS[120]
6
9
12
REAL GDP (Trillions of dollars)
15
18
SRAS[120]
0
(?)
Interpret the change you drew on the previous graph by filling in the blanks in the following paragraph:](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F748362b1-36ef-4c80-b961-e759c2b281c7%2Fb2a4dbca-ef8e-4dd2-88df-a4c4311225c0%2Fetmishj_processed.png&w=3840&q=75)
Transcribed Image Text:The following graph represents the short-run aggregate supply curve (SRAS) based on an expected price level of 120. The economy's full-
employment output level is $9 trillion.
Major unions across the country have recently negotiated three-year wage contracts with employers. The wage contracts are based on an expected
price level of 120, but the actual price level turns out to be 160. Show the short-run effect of the unexpectedly high price level by dragging the curve
or moving the point to the appropriate position.
PRICE LEVEL (CPI)
240
200
160
40
0
0
3
SRAS[120]
6
9
12
REAL GDP (Trillions of dollars)
15
18
SRAS[120]
0
(?)
Interpret the change you drew on the previous graph by filling in the blanks in the following paragraph:
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