Supply and Demand and Aggregate Demand Curve
Minghao Feng
ECO 102 B
Assignment #6
03/25/2014
SECTION ONE: 1 point
Here you will find questions related to chapter 27. a Assume that employers and workers agree that real wages should rise by 2% next year. If inflation is expected to be 2% next year, what will workers ask for in regard to wages next year?
From the question we know that employers and workers want to raise real wages by 2%. But inflation will be 2% in next year. Actually, the employers and workers do not changer their real wages, so they shod ask for the real wages rise to 4%.
b If inflation is expected to be 4% next year, rather than 2%, what will workers ask for?
They should ask the real wages rise to 6%.
c Use your answers from parts a and b to explain how an increase in expected inflation will affect the following year’s actual rate of inflation.
An increase in expected inflation raises inflation because firms and workers care about real prices and wages when they set nominal prices and wages. If expected inflation is higher, newly set prices and wages will be higher.
d Draw the relevant AS curves showing what will happen if expected inflation falls. Label everything and discuss (typed).
When the inflation falls, the AS curves shit upward, because the price level will increase.
SECTION TWO: 2 points
Explain for each event whether it changes the short-run aggregate supply, long-run aggregate supply, or a combination of the two, and why.
a) Automotive firms in the United States switch to a new technology that raises productivity.
Technological change enables firms to produce more from any given amount of facts of production. Therefore, technology increases potential GDP. So, an increase in potential GDP increases both- long run aggregate supply and short- run aggregate supply.
b)Toyota and Honda build additional plants in the United States.
Toyota and Honda build more plants in the United States; it
ECO 102 B
Assignment #6
03/25/2014
SECTION ONE: 1 point
Here you will find questions related to chapter 27. a Assume that employers and workers agree that real wages should rise by 2% next year. If inflation is expected to be 2% next year, what will workers ask for in regard to wages next year?
From the question we know that employers and workers want to raise real wages by 2%. But inflation will be 2% in next year. Actually, the employers and workers do not changer their real wages, so they shod ask for the real wages rise to 4%.
b If inflation is expected to be 4% next year, rather than 2%, what will workers ask for?
They should ask the real wages rise to 6%.
c Use your answers from parts a and b to explain how an increase in expected inflation will affect the following year’s actual rate of inflation.
An increase in expected inflation raises inflation because firms and workers care about real prices and wages when they set nominal prices and wages. If expected inflation is higher, newly set prices and wages will be higher.
d Draw the relevant AS curves showing what will happen if expected inflation falls. Label everything and discuss (typed).
When the inflation falls, the AS curves shit upward, because the price level will increase.
SECTION TWO: 2 points
Explain for each event whether it changes the short-run aggregate supply, long-run aggregate supply, or a combination of the two, and why.
a) Automotive firms in the United States switch to a new technology that raises productivity.
Technological change enables firms to produce more from any given amount of facts of production. Therefore, technology increases potential GDP. So, an increase in potential GDP increases both- long run aggregate supply and short- run aggregate supply.
b)Toyota and Honda build additional plants in the United States.
Toyota and Honda build more plants in the United States; it