of Principles Macroeconomics Problem Set Four 1. Explain how each of the following events would likely affect: (1) real GPD, (2) the aggregate price level, and (3) the unemployment rate in the short run. When answering each question, use an aggregate demand and aggregate supply diagram to support your answer. A terrorist attack in the United States reduces firm and consumer confidence. President Bush and Congress cut personal income tax rates and corporate income tax rates. A large increase in interest rates. A sharp increase in input costs accompanied by a sharp decline in consumer confidence. A sharp decline in oil prices accompanied by a tax cut.
1a) 1b) 1c) 1d) 1e)
2.
Suppose that a stock market crash causes the economy to slip into a recession and thus causes real GDP to fall below the potential level of output in the economy. Use an aggregate demand and aggregate supply diagram to illustrate this short-run situation. Now carefully explain how the economy will return to a long-run equilibrium. Use an aggregate demand and aggregate supply diagram to support your answer.
2a) 2b)
3. Suppose that conflict in the Middle East and Africa leads to a very sharp rise in oil prices. 3a) How would the rise in oil prices likely affect national output, the price level, and unemployment in the short-run? Illustrate your answer using an aggregate supply and aggregate demand diagram. Now carefully explain how economy the will return to a long-run equilibrium. Use an aggregate demand and aggregate supply diagram to support your answer.
3b)
4. Use the information in the following table to answer the next several questions. Year 1 2 3 4 5 Real GDP 8,000 8,400 8,500 8,200 7,900 GDP Deflator 100 110 115 120 125 Unemployment Rate 6.5% 5.8% 5.6% 6.2% 7.1%
4a)
4b) 4c)
4d)
Suppose that in Year 1 the economy was operating at full potential. What is the most likely explanation (a shift left or right in aggregate demand or a shift left or right in short-run aggregate supply) for the changes in real GDP, the GDP Deflator and the Unemployment Rate between years 1 and 3? Illustrate your answer using an aggregate demand and aggregate supply diagram. What are some of the economic events that might explain the changes in real GDP, the GDP Deflator and the Unemployment Rate between years 1 and 3? Now suppose that in Year 3 the economy was operating at full potential. What is the most likely explanation (a shift left or right in aggregate demand or a shift left or right in short-run aggregate supply) for the changes in real GDP, the GDP Deflator and the Unemployment Rate between years 3 and 5? Illustrate your answer using an aggregate demand and aggregate supply diagram. What are some of the economic events that might explain the changes in real GDP, the GDP Deflator and the Unemployment Rate between years 3 and 5?