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posted by  mhg on 7/14/2009 2:54:32 AM  |  status: Live  |  Earned Karma: 25

Economics

Course Textbook Chapter Problem Needs by
Economics Macroeconomics by William A McEachern student edition 11 N/A N/A
Question Details:
1) Changes in aggregate suply:
    List three factos that can change the economy's potential output.
    What is the impact of shifts of the aggregate demand curve on potential output?
2) In interpreting the short-run aggregate supply curve, what does the adjective short-run mean?
    Explain the role of labor contracts along the SRAS curve.
3) How does an economy that is experiencing an expansionary gap adjust in the long run?
Thank you for your help.
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Sage
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posted by Domokun on 7/14/2009 9:25:52 AM  |  status: Live
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Response Details:
1) Three factors that can affect the economy's potential output:
- Technology
- Abundance/price of raw materials
- Supply of labor
While shifts in the aggregate demand curve will not affect how much output an economy is capable of producing, it will shift the actual mix of products in favor of those for which there is more demand.
2) The adjective short-run refers to the time period in which at least one factor of production is fixed, and the fixed factors have no impact on a company's decision making process.
Labor contracts convert labor from variable to fixed costs in the short run, as they promise the workers a fixed amount of money for a certain period of time. Because of this inability to regard labor as a variable cost, the company is unable to cut back on workers immediately when demand is insufficient and is afraid to take on additional workers temporarily.
3) An expansionary gap is a negative output gap, occurring when actual output is higher than potential output. To correct this gap, inflation occurs and costs increase. In terms of active governmental intervention, the goal should be to reduce aggregate demand via contractionary policies.
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