The economy of Country X is at full employment. (a) …

Physics Questions
Short Answer
Step by Step Solution
Physics Questions

The economy of Country X is at full employment. a) Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves, and show each of the following. (i) Current price level, labeled PL1. (ii) Current real output, labeled Y. (b) Assume that household income increases as a result of recent economic prosperity in Country X. On your graph in part a), show the effect of the increase in household income on real output and price level. (c) What will be the effect of the change identified in part (b) on unemployment in Country X? (d) Will the change in real output shown in part (b) be smaller or larger in the presence of automatic stabilizers? Explain.

Short Answer

The answer explains the concepts of aggregate supply and demand, highlighting how increased household income shifts the aggregate demand curve upward, leading to higher price levels and real output. This increase in output reduces unemployment and is supported by automatic stabilizers in the economy.

Step-by-Step Solution

Step 1: Understand Aggregate Supply and Demand

In the long run, the aggregate supply (AS) will be vertical, indicating the potential GDP level where full employment is achieved. The short-run aggregate supply (SRAS) curve has an upward slope, demonstrating the relationship between the price level and the quantity of output supplied. Meanwhile, the aggregate demand (AD) curve reflects total spending on goods and services at varying price levels.

Step 2: Impact of Increased Household Income

An increase in household income leads to an upward shift in the AD curve, which subsequently raises both the price level and real output within the economy. The result is a new equilibrium that features a higher price level (PL2) and increased real output (Y2), signifying growth in economic activity.

Step 3: Effects on Unemployment and Automatic Stabilizers

The rise in real output from increased household income causes a decrease in unemployment in Country X, as more workers are needed to meet the economic demand. In addition, this change is further magnified by the presence of automatic stabilizers such as unemployment benefits and progressive income taxes, which enhance the economy’s responsiveness to fluctuations in aggregate demand.

Related Concepts

Aggregate Supply (As)

The total supply of goods and services that firms in an economy are willing and able to sell at a given overall price level in a specific time period

Aggregate Demand (Ad)

The total demand for all goods and services in an economy at a given overall price level and in a given time period

Automatic Stabilizers

Economic policies and programs that respond automatically to changes in economic conditions, helping to stabilize the economy by increasing or decreasing government spending and taxes without additional legislative action.

Table Of Contents
  1. The economy of Country X is at full employment. a) Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves, and show each of the following. (i) Current price level, labeled PL1. (ii) Current real output, labeled Y. (b) Assume that household income increases as a result of recent economic prosperity in Country X. On your graph in part a), show the effect of the increase in household income on real output and price level. (c) What will be the effect of the change identified in part (b) on unemployment in Country X? (d) Will the change in real output shown in part (b) be smaller or larger in the presence of automatic stabilizers? Explain.

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