Question

Economist Brown believes that changes in aggregate demand affect only the price level, and economist Black believes that changes in aggregate demand affect only Real GDP. What does the aggregate supply (AS) curve look like for each economist?

Answer 1

Answer:

Economist Brown : Perfectly Inelastic (Vertical) Aggregate Supply

Economist Black : Perfectly Elastic (Horizontal) Aggregate Supply

Explanation:

Economy is at equilibrium where : Aggregate Demand = Aggregate Supply.

Aggregate Demand is downward sloping curve, as aggregate demand is inversely related with price. Increase in AD shifts the AD curve rightwards.

Aggregate Supply is usually upward sloping curve, as it is directly related to price. However, as per given special cases by Economists Black & Brown, it is as undermentioned :

• Black : AD increase (rightwards shift) increases only price if - Aggregate Supply is perfectly inelastic i.e non respondent to price & AS curve is vertical.

Real GDP is the total value of goods & services produced by an economy, valued at constant base prices. Increase in real GDP implies increase in production quantity.

• Brown : AD increase (rightwards shift) increases only Real GDP (quantity) if - Aggregate Supply is perfectly elastic (infinitely respondent to price, so prices constant) & AS curve is horizontal.