Macroeconomics, Essay Example

Between the fourth quarter of 2007 and the first quarter of 2009, the U.S. unemployment rate rose from 4.8 percent to 8.5 percent. In the aggregate demand and aggregate supply graph shown, where would the long-run aggregate supply curve have been in 2009? Briefly explain.

The long-run aggregate supply curve would have been at $12.7 trillions of 2005 dollars. This is because the long-run aggregate supply curve is actually a vertical line and is a result of production meeting at a price level. This is the point at which production is at its maximum potential regardless of price. The unemployment rate increased from 4.8% to 8.5% which means that the U.S. was not producing to its maximum potential. This is representative of a recessionary state in the economy. LRAS can shift back, as it does in 2009, due to the changes in capital, labor and potentially labor. The shift in 2009 can be attributed to a certain degree with the unemployment rate increase. The LRAS did not shift due to the lack of demand but due to the lack of employees to generate more products for the consumer.

For the second quarter of 2011, real GDP in 2005 dollars was $13.3 trillion and the price level was 116.0. Use an aggregate demand and aggregate supply graph to illustrate the changes from the first quarter of 2009 to the second quarter of 2011 and explain what happened to aggregate demand and aggregate supply to result in these changes.

The graph depicts a shift in the LRAS out which shows an increase in the ability to produce goods. This could come from the increase in work force, decrease of inputs costs or a technological advancement to increase efficiency. The aggregate supply shows how the amount of real GDP is supplied at certain price levels. The aggregate demand increase is in line with the rate of the increase for supply. The aggregate supply increases accordingly to the increase in GDP. This means that with the short-run aggregate supply the firms increased their capital which increased production. The two main factors for aggregate supply to change include a change in input prices and positive economic growth.

As with aggregate supply, aggregate demand does not change due to a change in price level. Aggregate demand is influenced by different components of GDP such as consumption, changes in spending, exports, and other demand factors. The demand for certain factors of the GDP will move the demand curve. The demand curve shows the total amount of goods demanded by the entire economy at multiple price levels. The aggregate demand pushed out in the chart showing an increased demand due potentially due to how the GDP was being consumed. As the curve shifted outward this means that at that price level the amount of GDP demanded has increased. This is depicted in the graph.