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Homework answers / question archive / 1)Suppose the new technological advance boost up production of farm crops and hence reduce the price of food
1)Suppose the new technological advance boost up production of farm crops and hence reduce the price of food. a. Graphically illustrate the given situation on the AD-AS model and the Phillips curve. (Remark: make sure to explicitly depict the resulting change in the price level (P), aggregate output (Y), inflation rate (Tt) and unemployment rate.) Goods & Services Market Phillips Curve b. What is the effect on the short-run trade-off between inflation and unemployment?
2)Suppose the price of felt tip pens decreased by 14%, and as a result, the quantity demanded increased by 7%. The price elasticity of demand for felt tip pens is:
O 0.75
1.5
O 2.0
0.5
1)
.because of technological innovation,production of farm crops has increased.as a result of this aggregate supply will increase and aggregate output will also increase.this we have to graphically show on the AD-AS graph.on this graph price will be decreasing and aggregate output will be increasing.
Price of the farm crops have decreased.this change we have to graphically show on phillips curve diagram.phillips curve shows the trade-off between inflation and unemployment.now here the trade-off is going to be having inverse relationship,that is if inflation is less then unemployment will be more and vice-versa.in this question price is decreasing and therefore inflation will be less and unemployment will be more.
Bb.short-run trade-off between inflation and unemployment
In the short run according to phillips curve there is a trade-off between inflation and unemployment,now this trade-off is having inverse relationship.if inflation is more then unemployment will be less and vice-versa.so for example if inflation increases to 10% then unemployment decreases by 5%.so basically what happens in the short run is that if prices increase inflation will increase and as a result of that unemployment will decrease.when inflation is more,firms are able to sell more at higher prices and because of that they will make more profits.as a result of this firm's will be able to hire more workers and in this way employment will increase and unemployment will decrease.
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2)
Percentage change in quantity demanded = 7%
Percentage change in price = 14%
Price elasticity of demand = Percentage change in quantity demanded / percentage change in price
= 7/14 = 0.5
