Assume the economy of Andersonland is in a long-run equilibrium with full employment. In the short run, nominal wages are fixed. (a) Draw a correctly labeled graph of short-run agg... Assume the economy of Andersonland is in a long-run equilibrium with full employment. In the short run, nominal wages are fixed. (a) Draw a correctly labeled graph of short-run aggregate supply, long-run aggregate supply, and aggregate demand. Show each of the following: (i) Equilibrium output, labeled Y1 (ii) Equilibrium price level, labeled PL1 (b) Assume there is an increase in exports from Andersonland. On your graph in part (a), show the effect of higher exports on the equilibrium in the short run, labeling the new equilibrium output and price level Y2 and PL2, respectively. (c) Based on your answer in part (b), what is the impact of higher exports on real wages in the short run? Explain. (d) As a result of the increase in exports, export-oriented industries in Andersonland increase expenditures on new container ships and equipment. (i) What component of aggregate demand will change? (ii) What is the impact on the long-run aggregate supply? Explain.
Understand the Problem
The question is asking to analyze the economy of Andersonland under various conditions regarding aggregate supply and demand. It involves graphing concepts of equilibrium in both short-run and long-run contexts, and assessing the impacts of increased exports on output, price levels, and real wages.
Answer
Higher exports increase AD, leading to higher output (Y2) and price level (PL2). Real wages fall. Investment in new capital goods may increase LRAS over time.
(a) Draw the aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) curves. Label the intersection as Y1 and PL1. (b) Shift the AD curve to the right due to higher exports, marking the new equilibrium as Y2 and PL2. (c) Real wages fall since nominal wages are fixed and the price level has increased. (d) (i) Investment component of aggregate demand increases. (ii) Long-run aggregate supply may increase due to new investment in capital goods.
Answer for screen readers
(a) Draw the aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) curves. Label the intersection as Y1 and PL1. (b) Shift the AD curve to the right due to higher exports, marking the new equilibrium as Y2 and PL2. (c) Real wages fall since nominal wages are fixed and the price level has increased. (d) (i) Investment component of aggregate demand increases. (ii) Long-run aggregate supply may increase due to new investment in capital goods.
More Information
The increase in exports boosts aggregate demand, initially increasing output and price levels. As nominal wages are fixed in the short run, the real wage decreases because the price level rises faster than wages.
Tips
A common mistake is forgetting the distinction between short-run and long-run effects, especially on wage adjustments.
Sources
- AP Macroeconomics Student Samples from the 2023 Exam - College Board - apcentral.collegeboard.org
- FRQ Corner | cannonecon - blargy14.wixsite.com
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