Using an aggregate demand and supply diagram, explain how each of the following scenarios affects the equilibrium price level and aggregate output. Consider first the short-run, then the long-run equilibrium for each scenario.

a) Consumers expect a recession, while resource prices rise at the same time.
b) Foreign income falls as domestic technology improves.
c) Foreign price level rises as domestic government cuts taxes.

Hi, I do not need this answered. Just explained in simpler terms. I have read the chapters pertaining to this topic I just don't understand the terms making answering the question hard. aggregate demand and supply diagram? equilibrium? i'm lost

No problem! I can help explain these concepts to you in simpler terms.

An aggregate demand and supply diagram looks at the overall demand and supply in an entire economy rather than focusing on specific markets for goods and services. It shows the relationship between the price level and the quantity of goods and services produced and bought in an economy.

Equilibrium in this context means the point where the aggregate demand and aggregate supply curves intersect, indicating a balance between the quantity of goods and services demanded and supplied in the economy. It is the combination of price level and output level where the economy is in balance with no upward or downward pressure.

Now, let's break down each scenario and see how they affect the equilibrium price level and aggregate output in the short-run and long-run.

a) Consumers expect a recession while resource prices rise at the same time:
In the short-run, consumers' expectations of a recession would lead to a decrease in aggregate demand, shifting the aggregate demand curve to the left. This would result in a lower equilibrium price level and a decrease in aggregate output.
In the long-run, the decrease in aggregate demand would cause resource prices to fall due to reduced demand for resources. As the resource prices decrease, the short-run aggregate supply curve shifts to the right, eventually restoring the economy to a new long-run equilibrium with a lower price level and potentially the same aggregate output.

b) Foreign income falls as domestic technology improves:
In the short-run, when foreign income falls, it leads to a decrease in exports, which in turn lowers aggregate demand. This causes the aggregate demand curve to shift to the left, resulting in a lower equilibrium price level and a decrease in aggregate output.
In the long-run, if domestic technology improves, it will increase productivity and decrease costs. This leads to a decrease in prices, causing the short-run aggregate supply curve to shift to the right. As a result, the economy reaches a new long-run equilibrium with a lower price level but potentially the same or higher aggregate output.

c) Foreign price level rises as domestic government cuts taxes:
In the short-run, when the foreign price level rises, it makes imports relatively cheaper, which increases aggregate demand. This shift in aggregate demand causes the equilibrium price level to rise and aggregate output to increase.
In the long-run, if the domestic government cuts taxes, it can stimulate domestic consumption and investment. This increases aggregate demand and shifts the aggregate demand curve further to the right. However, if the foreign price level is still higher, it leads to an increase in imports, which reduces aggregate output and restores the economy to a new long-run equilibrium with a higher price level and potentially the same aggregate output.

I hope this helps clarify the concepts explained in simpler terms! Let me know if you have any further questions.

No problem! I'll explain these terms in simpler terms to help you understand.

Aggregate demand and supply diagram: This is a graphical representation of the total demand and supply in an economy. It shows the relationship between the overall level of spending in the economy (aggregate demand) and the total production output (aggregate supply).

Equilibrium: In economics, equilibrium refers to a state where supply and demand are balanced. In the context of the aggregate demand and supply diagram, it means the point where the total quantity of goods and services demanded equals the total quantity of goods and services supplied.

Now let's take a look at each scenario and how it affects the equilibrium price level and aggregate output in the short run and long run:

a) Consumers expect a recession, while resource prices rise at the same time:
In the short run, if consumers expect a recession, they may reduce their spending. This would reduce the aggregate demand, causing the equilibrium price level and aggregate output to decrease. However, if resource prices rise, it would increase the cost of production, reducing the aggregate supply. This reduction in both aggregate demand and supply would likely lead to a decrease in the equilibrium price level in the short run.

In the long run, if resource prices continue to rise, it may discourage firms from investing and expanding their production capacity. This could further reduce aggregate supply. As a result, both the equilibrium price level and aggregate output might decrease even more.

b) Foreign income falls as domestic technology improves:
In the short run, if foreign income falls, it would reduce the demand for domestically produced goods and services. This decrease in aggregate demand would lead to a decrease in the equilibrium price level and aggregate output.

However, if domestic technology improves, it can increase the productivity of the domestic firms and decrease their production costs. This would increase the aggregate supply, which could partially offset the decrease in aggregate demand. As a result, the equilibrium price level might decrease, but the impact on aggregate output could be less pronounced.

In the long run, the improvement in domestic technology might allow domestic firms to be more competitive in the global market, leading to an increase in exports. This could help recover some of the lost demand from the decrease in foreign income. Therefore, the impact on the equilibrium price level and aggregate output could be less significant in the long run.

c) Foreign price level rises as domestic government cuts taxes:
In the short run, if the foreign price level rises, it would make imports relatively cheaper and reduce the demand for domestic goods and services. This decrease in aggregate demand would lead to a decrease in the equilibrium price level and aggregate output.

However, if the domestic government cuts taxes, it can increase people's disposable income and encourage spending. This would increase the aggregate demand, partially offsetting the decrease due to the rising foreign price level. As a result, the equilibrium price level might increase, but the impact on aggregate output could be less pronounced.

In the long run, if the foreign price level continues to rise, it may make imports even more attractive. This could lead to a more significant decrease in the demand for domestic goods and services. As a result, both the equilibrium price level and aggregate output might decrease even more.

I hope this explanation helps you understand these concepts better. Let me know if you have any further questions!