Question

suppose the full-employment level of real output (q) for a hypothetical economy is $500 and that the price level (p) initially is 100. use the following short-run aggregate supply schedules to answer the next question. (a) as(p100) (b) as(p125) (c) as(p75) p q p q p q 125 $560 125 $500 125 $620 100 500 100 440 100 560 75 440 75 380 75 500 refer to the information above. in the long run, a fall in the price level from 100 to 75 will:

Answer 1

In the long run, a fall in the price level from 100 to 75 will result in an adjustment back to the full-employment output of $500, as lower input prices, including wages, shift the short-run aggregate supply to the right, eventually restoring the equilibrium at a lower price level.

Step-by-step explanation:

In a hypothetical economy where the full-employment level of real output (Q) is $500 and the initial price level (P) is 100, let's consider what happens if there is a fall in the price level from 100 to 75 in the long run. According to the given short-run aggregate supply schedules, when the price falls to 75, the output (Q) decreases below the full-employment level for schedules (a) AS(P100) and (b) AS(P125), but interestingly increases to full employment for schedule (c) AS(P75).

In the long run, the economy is expected to adjust and move back to the full-employment output of $500. This adjustment is due to lower wages and other input prices, which will shift the short-run aggregate supply curve (SRAS) to the right. The new equilibrium will be at a lower price level, with real output returning to the full-employment level of $500. This concept is supported by the long-run aggregate supply (LRAS) which is vertical at the level of potential GDP, indicating that in the long run, the economy's output is determined by its productive capacity, not by the price level.