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KW_Macro_Ch_10_End_of_Chapter_Problems - chapter 10...

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>> Aggregate Supply and Aggregate Demand chapter 10 1. Your study partner is confused by the upward-sloping short-run aggregate supply curve and the vertical long-run aggregate supply curve. How would you explain this? 2. Suppose that in Wageland all workers sign annual wage contracts each year on January 1. No matter what happens to prices of final goods and services during the year, all workers earn the wage specified in their annual contract. This year, prices of final goods and services fall unex- pectedly after the contracts are signed. Answer the following questions using a diagram and assume that the economy starts at potential output. a. How will the quantity of aggregate output supplied respond to the fall in prices? b. What will happen when firms and workers renegotiate their wages? 3. In each of the following cases, in the short run, determine whether the events cause a shift of a curve or a movement along a curve. Determine which curve is involved and the direc- tion of the change. P R O B L E M S
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a. As a result of an increase in the value of the dollar in relation to other currencies, American producers now pay less in dollar terms for foreign steel, a major commodity used in production. b. An increase in the quantity of money by the Federal Reserve increases the amount of money that people wish to lend, lowering interest rates. c. Greater union activity leads to higher nominal wages. d. A fall in the aggregate price level increases the purchasing power of households’ money holdings. As a result, they borrow less and lend more. 4. A fall in the value of the dollar against other currencies makes U.S. final goods and servic- es cheaper to foreigners even though the U.S. aggregate price level stays the same. As a result, foreigners demand more American aggregate output. Your study partner says that this represents a movement down the aggregate demand curve because foreigners are demanding more in response to a lower price. You, however, insist that this represents a rightward shift of the aggregate demand curve. Who is right? Explain.
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KW_Macro_Ch_10_End_of_Chapter_Problems - chapter 10...

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