Aggregate Models and Macroeconomic Policies

Running head: AGGREGATE MODELS AND MACROECONOMIC POLICIES
Aggregate Models and Macroeconomic Policies
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AGGREGATE MODELS AND MACROECONOMIC POLICIES1
Table of Contents
Part 1................................................................................................................................................2
Answer 1......................................................................................................................................2
Part 2................................................................................................................................................3
Answer 1......................................................................................................................................3
References........................................................................................................................................6

AGGREGATE MODELS AND MACROECONOMIC POLICIES2
Part 1
Answer 1
a.The given statement is false.
The short run supply curve shows the relation between aggregate output and price level in
the short run. The supply curve in the short run slopes upward because aggregate supplied
quantity increases with increase in prices. In the short run, firms have at least one fixed
production input (normally capital). As the curve shifts rightward, there is an increase in real
GDP and aggregate output at the given price (Goodwin et al., 2015). This indicates a positive
correlation between output and price level. This positive correlation between output and price is
reflected in the upward sloping short run supply curve.
b. The given statement is false.
The long run aggregate supply curve is vertical at the level of potential output. The long
run supply curve though changes slowly but it is not true that long run can never be shifted. The
supply curve in the long run can shift due to a change in quantity of factor of production. For
example, if the number of workers available increase or if there is an increase labor hours, then
the supply curve shifts rightward (Gandolfo, 2016). An improvement in technology can also shift
long run supply curve outward by increasing potential output with the same amount of output.
c. The given statement is true.
Either a decrease in nominal money supply or an increase in price level means a decrease
in real money balance. Decrease in money supply shifts the real money curve to the left. Given
the money demand, a decrease in real money supply increases the interest rate. As interest rate