Macroeconomics Answer Note #3

Question 2 Using an Aggregate Demand/Aggregate Supply framework, start with the macroeconomy in a recessionary gap. A regulatory change makes electricity cheaper in the short-run. What would be the impact on the broader economy from the regulatory change. Show the initial equilibrium, price level and equilibrium real GDP and position of the long-run aggregate supply curve, the short-run aggregate supply curve, and the aggregate demand curve. The show the changes and new equilibrium price level and real GDP. 15 Points. Graph is required. Answer 039;s examine the impact of the regulatory change on the economy. The decrease in the cost of electricity reduces production costs for firms, which leads to an increase in aggregate supply. This can be represented by a shift of the SRAS curve to the right, from SRAS0 to SRAS1, as shown in the graph below. As a result of the shift in the SRAS curve, the economy moves towards its potential output, and the equilibrium point shifts from E0 to E1, where AD intersects SRAS1 and LRAS. This increase in output leads to a decrease in prices, which is represented by a decrease in the equilibrium price level from Po to P1. The new equilibrium real GDP is now Y1, which is higher than the initial level of output. In summary, the regulatory change that reduces electricity costs has a positive impact on the broader economy. It increases output and lowers prices, which improves economic growth and reduces inflationary pressures. However, it is important to note that these changes are only in the short-run. In the long-run, the LRAS curve will adjust to the new equilibrium level of output, and the economy will return to its potential output of Y0, but at a lower price level of P1.