(b) Assume that there is an increase in exports from Andersonland. On your graph in part (a), show the effect of higher exports on the equilibrium in the short-run, labeling the new equilibrium output and price level Y2 and PL2, respectively.
(c) Based on your answer in part (b), what is the impact of higher exports on real wages in the short-run? Explain.
In the short-run is what you have to have noticed,,,, as wages can't adjust in the short-run,,, therefore if the price level is increasing and wages are not,, real wages are falling.
Answer - One point is earned for stating that real wages will fall because the price level has increased and the nominal wages are fixed in the short run.
(d) As a result of an increase in exports, export oriented industries increase expenditures on new container ships and equipment.
(i) What component of aggregate demand will change?
New container ships and equipment are increases in capital and therefore Investment will increase.
Answer - One point is earned for stating that the investment component of AD will change.
(ii) What is the impact on the Long-run aggregate supply? Explain.
Think of increases in the capital stock as increasing efficiency and productivity and increasing the potential output of the economy.
Answer - One point is earned for stating that the long-run aggregate supply curve will shift to the right because the capital stock has increased.