1) Long-run Macroeconomic Equilibrium and Stock Market Boom Let us assume the economy reaches its long-run macroeconomic equilibrium in 2020. When the economy is in the long-run macroeconomic equilibrium, the stock market will also reach its boom. This will in turn lead to increases in stock prices more than expected, and the stock prices will stay high for some period. Answer the following questions based on the scenarios of long macroeconomic equilibrium and consequent stock market boom.
The aggregate demand curve will shift the right. When the GDP rises, the AD curve will shift.
Since the demand shifts to the right, both the price and output (real GDP) will increase.
The expected price level will rise and workers will also increase their bargaining power and demand for better wage.
The short-run aggregate supply curve will shift to the left.
They differ since the price level is higher and the real GDP is the same.
2) Studies indicate that net exports and net capital outflows tend to be equal.
The net export and net capital outflow are equal because every international transaction is the same. Precisely, the value of goods and services produced in a country is equal to the value of payments of assets made by the buyers to the producers in other countries. Similarly, when buyers in other countries trade their assets, they convert them to equal amount in the country’s currency and use the same amount to cater for their export products (Krugman & Wells, 2009). Interest entails the cost the individual will incur for holding money. Therefore, if an individual expects more money to be devalued, there will be more demand for interest compensation.
An increase in interest rates due to the increase in price will discourage investment since the rate at which investors will pay back the borrowed amount is high. Similarly, high interest rates reduces the supply of dollars in foreign exchange market (Krugman & Wells, 2009). The dollar will appreciate and this will decrease the net export.
3) Assume there is a decrease in the demand for goods and services, which leads to a decrease in the real GDP and eventually the economy into recession.
During a recession individuals tend to save money since they have lost confidence in it; therefore, the low inflation rate is accompanied by a fall in price level.
When the aggregate demand decreases, the price level will eventually fall. If the government does not take any action to counter the situation, the actual price level will fall below people’s expectation. However, people will correct their expectations and the level of prices and wages will adjust shifting the aggregate supply curve to the right. This will cause output to rise back to its natural rate.
4) A number macroeconomic variables decline during recessions. One of these variables is the GDP.
During a recession, the following components tend to decline; investment, employment, sales, income and purchases. In a situation when the economy experiences recession, the value of money decreases and this will result to less investment, income, sales, purchases and employment. The overall result would be a fall in real GDP.
The long-run trend in real GDP is upward; however, during recession, the real GDP tends to flatten. Therefore, when the U.S. economy experienced expansion and recession, the general trend of real GDP increased. The factor that might cause an upward trend in spite of the business cycles is war. The U.S. economy experienced average expansion that lasted for fifty eight months and average recession that lasted for eleven months during the post-World War II period. Similarly, the 2001 recession lasted for eight months hence it was slightly shorter than the average recession. The longest recession was between 2007 and 2009 and it lasted for eighteen months.
5) Assume there are short-run and long-run Macroeconomic Equilibriums in the economy.
Refer to the AS and AD curves above to answer the following questions.
The initial long-run macroeconomic equilibrium is at point A. The equilibrium price is P1 and equilibrium output is Y1. The long-run aggregate supply curve indicates that the GDP reaches full employment and the natural rate of output is the equilibrium price. The AS curve is in equilibrium with the AD and the long-run supply curve.
The factors that can cause the short-run supply curve to shift to the right include changes in the capital stock, level of technology and changes in the prices of factors of production. Other factors include a rise in inflation and changes in the stock of natural resources. Point A represents long-run macroeconomic equilibrium. This is because the economy reaches a long-run equilibrium at a point where the aggregate demand curve intersects the long-run aggregate supply curve (Moffatt, 2012). At point B, the economy is at short-run macroeconomic equilibrium. Therefore, at point B, the aggregate demand curve intersects the short-run aggregate supply curve.
The economy will experience a rising price level and a decreasing level of output in the long-run. Similarly, the economy will not reach long-run equilibrium because it occurs at the point of intersection between the aggregate demand curve and the long-run aggregate supply curve.
Krugman, P., & Wells, R. (2009). Macroeconomics. New York, N.Y.: Worth Publishers.
Moffatt, M. (2012). Short-run vs. Long-run. Retrieved from http://economics.about.com/cs/studentresources/a/short_long_run.htm.
Do you need an Original High Quality Academic Custom Essay?