Chapter 33 part 2

6.
a. According to Sticky Wage, if the economy is in a recession,
then the price level falls, and nominal wages stay constant. Thus
real wages rise, which increases the labor cost, causing firms to
hire less. However, the nominal wages eventually will adjust to
the new price level, causing real wages to decline, and bringing
the economy back to its natural level of production.
According to Sticky Price, if the economy is in a recession, the
price level falls, and nominal prices remain constant. Thus, firms
are selling goods for prices which are unaffordable, and thus less
people buy them, and production decreases. However, as prices
adjust to the new price level, people will buy more, and increase
production.
According to Misperceptions theory, if the economy is in a
recession and price level falls below expected, firms will believe
that it is just their products and will thus produce less. This
decreases production, but as expectations adjust, it returns back
to the natural rate of production.
b. The speed is determined by how long it takes for the
expectations to adjust.

7.
The short run supply curve will shift to the left, the aggregate
demand curve will shift to the right. (as shown above) The economy
will have no change in output, but it will experience a change an
increase in price level. If people did not change their expected price
level, then the short run supply curve would not shift, and both
production and price level would increase.
8. a. They would expect a higher price level.

b. It would increase the nominal wage that workers and firms

agree on.
c. It would decrease the profitability of producing goods and
services at any given price level.
d. It will shift it to the left.
e. Price level rises, output decreases
f. This results in stagflation, which is not good and the choice of
chairman was a mistake.
9.
a. Households decide to save more, which shift Aggregate
Demand to the left.
This causes price level and output to decline.

b. This reduced natural resources causes SRAS and AS to shift to

the left. This causes price level to rise and output to fall.

c. If jobs leave the country, both SRAS and AS shift to the left.
The aggregate demand curve also shifts with fewer consumers in
the market. Price is indeterminate, and output falls.

10.
a. This causes a shift to the left in AD, thus in the short run, the
price level and output decrease. In the long run, AS shifts to the
right because the price level is lower than expected, which
means the output is unchanged, and price level falls.
b. If the federal government increases saving, AD rises, thus the
price level and output increase. In the long run, AS shifts to the
left because the price level is higher than anticipated, which
means output is unchanged, but price level rises.
c. When technological improvements occur, both the long run
and short run Aggregate supply shift right. This causes an
increase in output, and a decrease in price level.
d. A recession overseas causes a leftward shift in aggregate
demand. In the short run, AS shifts to the left because
production declines, causing a decrease in output and price level.
However, in the long run, the SRAS shifts back to the right
because the price level is below expected. Thus, in the long run,
output remains constant, but price level falls.
11.
a. An increase in optimism causes a rightward shift in aggregate
demand. Thus, this raises price levels and decreases production.
However, because price levels are above what is expected, the
aggregate supply curve now shifts leftward.

b. Eventually as misperceptions are removed, the short run

aggregate demand shifts leftward. This puts it back on the
natural output, but price level increases.
c. The investment boom would lead to an increase in capital
investment which would eventually lead to a rightward shift of
the supply curve.
12. Economy B would have a steeper curve because it is closer to the
LRAS, LRAS is constantly adjusting, just as the indexed wages are.
Thus, sticky wage does not apply to economy B, causing it to be closer
to vertical. A 5% increase in price level would affect economy A more
than economy B.