Economics Question

Cleisthenes

Cleisthenes

Cleisthenes

Soldato
Joined
29 Jul 2013
Posts
8,620
Hi guys, i'm studying second year Economics currently, and we are lookign at real rigidities. The question I face is: 'Using a standard New classical model of the economy, explain the impact of a positive AD shock on real GDP and unemployment. What are the key assumptions of this model?'

My lecture notes are awful and the actual slides were useless so i'm a bit screwed.

Thanks.
 
Do you have any idea where to start or are you expecting someone to write the whole thing for you?
 
gillywibble said:
Don't ask on here, they are economic Neanderthals.
Click to expand...
Oh deary me :mad:


Mikey1000 said:
At least share what you've figured out!
Click to expand...
My thinking is that as the LRAS curve is vertical in this instance, an AD positive shock would cause P to increase, hence increasing GDP. But, as supply cannot increase, unemployment will remain the same as there is no requirement for more labour.
 
If the LRAS curve is vertical, a shift right of the AD curve will only serve to raise GDP in the short run, not the long run. In the long run, real GDP will stay the same as the intersection of the AD curve and LRAS will move up not right, however prices will raise which may lead to higher inflation. Higher prices and inflation = less demand = a rise in unemployment.

Not a massively in depth reply I'm afraid but just Google something like 'vertical long run aggregate supply curve' and there should be loads of info.
 
benccritchley said:
My thinking is that as the LRAS curve is vertical in this instance, an AD positive shock would cause P to increase, hence increasing GDP. But, as supply cannot increase, unemployment will remain the same as there is no requirement for more labour.
Click to expand...

Presumably if we're talking real GDP it won't increase, as real GDP takes price inflation into account.
 
You still have to draw IS-LM curves no matter how "simple" the answer is supposed to be.

Presumably this is a setup question to rigidities.

Prices react instantly here, the rest you should be able to work out from what you have learnt.

edit: Don't use the a-level answer given above. It misses the point of what you are doing in a second year university degree.
 
Last edited:
muon said:
You still have to draw IS-LM curves no matter how "simple" the answer is supposed to be.

Presumably this is a setup question to rigidities.

Prices react instantly here, the rest you should be able to work out from what you have learnt.

edit: Don't use the a-level answer given above. It misses the point of what you are doing in a second year university degree.
Click to expand...
just come back to this thread out of interest regarding what you thought. thanks for all the replies, an I think you (muon) hit the nail on the head. I think I did need to think about is-lm, and although helpful, dantheman's comment is a little a level like xD :D
 
benccritchley said:
just come back to this thread out of interest regarding what you thought. thanks for all the replies, an I think you (muon) hit the nail on the head. I think I did need to think about is-lm, and although helpful, dantheman's comment is a little a level like xD :D
Click to expand...

I'd like to say I was an a-level economics student but I'm in my final year at university :D.
 
You must log in or register to reply here.
Back
Top Bottom