Chapter 27, Problem 1SPA

To determine

Identify the effect of the events on the quantity of real GDP supplies and aggregate supply and illustrate graphical representation.

Explanation of Solution

• The U.S firm move their call handling, IT, and data function to Country I:

A movement of call handling, IT, and data function from the U.D firm to Country I’s firm will cause an expansion of a business. In order to expand the business of the firm, it will result in demanding new capital, increase employment, and production. Therefore, the quantity of real GDP supplies and aggregate supply will increase.

Figure -1 shows the effect of movement of business from one firm to other firms as follows:

In Figure -1, the horizontal axis measures real GDP and the vertical axis measures price level.

In Figure -1, the curve short-run aggregate supply (SAS), long-run aggregate supply curve (LAS) at output Q represents the initial outcome of the economy. The result of the movement of firms operation from one place to another place will cause an increase in long-run aggregate supply and short-run aggregate supply and will result in a long-run aggregate supply curve (LAS₁) and short-run aggregate supply curve (SAS₁) shift to the rightward direction.    

• Fuel price rise:

A rise in fuel price will result in an increase in the price level, which will rise the cost of production and temporarily decrease the aggregate supply. This will cause the short-run supply shift to the leftward direction and long-run aggregate supply curve remain unchanged.

Figure -2 shows the impact of rising in fuel price as follows:

In Figure -2, the horizontal axis measures real GDP and the vertical axis measures price level.

In Figure -2, point E represents the initial equilibrium of the economy. Since as the rise in price cause a temporary decrease in short-run aggregate supply, which result in short-run aggregate supply curve shift to the leftward direction. Therefore, point E₁ represents the new equilibrium point and SAS₁ is the new short-run aggregate supply curve.

• Walmart and Starbucks open in Country I:

The Walmart and Starbucks open in Country I, which causes an expansion of their business. In order to expend the business of the firm, which will result in demanding new capital, increased employment, and production. Therefore, the quantity of real GDP supplies and aggregate supply will increase.

Figure -3 shows the effect of the expansion of business from one country to another country as follows:

In Figure -3, the horizontal axis measures real GDP and the vertical axis measures price level.

In Figure -3, the curve short-run aggregate supply (SAS), long-run aggregate supply curve (LAS) at output Q represents the initial outcome of the economy. The result of the expansion of a business into one country to another country will cause an increase in long-run aggregate supply and short run aggregate supply and will result in a long-run aggregate supply curve (LAS₁) and short-run aggregate supply curve (SAS₁) shift to the rightward direction.    

• Universities in the Country I increase the number of engineering graduates.

An increase in the number of engineering graduates in Country I will result in an increase in human capital and opportunity of employment expansion. Therefore, the quantity of real GDP supplies and aggregate supply will increase.

Figure -4 shows the effect of expansion of business from one country to another country as follows:

In Figure -4, the horizontal axis measures real GDP and the vertical axis measures price level.

In Figure -4, the curve short-run aggregate supply (SAS), long-run aggregate supply curve (LAS) at output Q represents the initial outcome of the economy. The result of an increase in the human capital and employment opportunity will cause an increase in long-run aggregate supply and short-run aggregate supply, which will result in a long-run aggregate supply curve (LAS₁) and short-run aggregate supply curve (SAS₁) shift to the rightward direction.

• The money wage rate rises:

An increase in the money wage rate causes an increase in the cost of production of the firm because with the existing employment rate, the firm will pay a high salary or wage for the same quantity of output. Therefore, there occur a temporarily decrease in the aggregate supply, which will cause the short-run supply to shift to the leftward direction and long-run aggregate supply curve remain unchanged.

Figure -5 shows the effect of a rise in the money wage rate as follows:

In Figure -5, the horizontal axis measures real GDP and the vertical axis measures price level.

In Figure -5, point E represents the initial equilibrium of the economy. Since as a rise in money wage rate causes a temporary decrease in short-run aggregate supply, which results in short-run aggregate supply curve shift to the leftward direction. Therefore, point E₁ represents new equilibrium point and SAS₁ is the new short-run aggregate supply curve.

• The price level in Country I increases:

In the short-run, an increase in the price level in the Country I cause an increase in the quantity supply of real GDP. Since an increase in price level causes an increase in the money wage rate, hence, in the long run, there occur an upward movement or real GDP along with long-run aggregate supply curve.

Figure -6 shows the impact of rise in the price level in Country I as follows:

In Figure -6, the horizontal axis measures real GDP and the vertical axis measures price level.

In Figure -6, a rising in the price level causes a rise in money wage rate, hence in the long-run, the quantity supplied of real GDP increases. Therefore, there occurs an upward movement along with the long-run aggregate supply curve and the short-run aggregate supply curve.