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Unformatted text preview: UL! J tillnil  um....to............‘, ._. Chapter 11 Aggregate Supply and Aggregate Demand . _ Quantity of real Quantity of real
Price IGVEI GDP demanded GDP supplied
(GDP deflator, , _ _ , 
2000 E .100) (tnlhons of 2000 (trillions 0132000
' dollars) dollars) (I:
:I .'
"i,
r.
.1. '1} Based on the table above,
a) What is the equilibrium price level and real GDP?
b) If potential GDP is $11.0 trillion, what does that imply about the economy's level of
employment?
c) if potential GDP is $9.0 trillion, what does that imply about the economy's level of
employment? Answer: a) The equilibrium price level is 105, the equilibrium real GDP is $10.0 trillion.
in) If potential GDP is $11.0 trillion, then the economy is at an equilibrium that is a below full—employment equilibrium.
c) If potential GDP is $9.0 trillion, then the economy is at an equilibrium that is an aboveé full~employinent equilibrium. 'i'it  ' WERE‘ Xzé I‘mvaéﬂ 5
52 MS
n 130
.C)
C')
CD
'61 120 6
; ﬁg 110
t 8.
' w 00
if l
d:
i E 90
g o. l . 1 i. I
o ’100 16.5 12.0 12.5 13's 13.5
Reol GDP (trillions 0F 2000 dollars] . t my; 2) in the above figure, what is the short—run equilibrium real GDPand the short—run equilibrium
price level? Answer: The short~run equilibrium occurs where the All curve intersects the SAS curve 50 in the
figure the short run equilibrium real GDP is $10.5 trilliOn and the short—run equilibrium
price level is 110. Chapter 12 Expenditure Multipliers: The Keynesian Model Consumption
expenditure
(trillions of 2000 '
dollars) Disposable in Com e
(trilliOns of 2000
dollars) _m,.. a...” _Wr was“ “mu—om Mﬂ‘._ ,_ _,m_ nunr ".'!v> “'us . w” l) The above table has data on the consumption function in the nation of Mzojo.
a] What is the amount ofautonomous consumption expenditure?
1)) What is the marginal propensity to consume? Answer: a) AutonomOus consumption expenditure equals the consumption exlraenditure when
disposable income is $0, so antenomous consumption expenditure is $0.8 trillion.
b)_ The marginal propensity to consume equals 0.8.0 0 trillion, consumption eXpenditure is $4.5 trillion. When disposal _ 2) When disposal income is $5.
mption expenditure is $5.0 trillion. What is the marginal propensity income is $6.0 trillion, consu
to consume? Answer: The marginal propensity to consume is the change in consumption expenditure divided
by the change in disposable income that brought it'about. In this case, the marginal propensity to. consume equals ($0.5 trillion)f($1.0 trillion) = 0.50. 3) At$10,0_00 ofdisposabie income, Audrey's Consumption expenditure was $11,000. At $20,000 of
disposable incorne, Audrey's consumption expenditure was $19,000. What is Audrey's marginal propensity to consume? penditure divided Answer: The marginal propensity to consume is the change in consumption ex
by the change in disposable income that brought it about. In this case, the marginal propensity to consume equals ($8,000)[($10.000) = 0.80. Real GDP (3 l G
(billions of 2000 (billions of (billions of (billiOns of
dollars) 2000 dollars) 2000 dollars) 2000 dollars) \DCQ
EDD
DC) 4) The above table gives information for the nation of North Hampton. There are no imports to or exports [Tom North Hampton. a) Find aggregate planned expenditure for each level of real GDP.
i b) What is the equilibrium level of real GDP?
1,
l
l
l
1 Answer:
Aggregate
Real GDP (trillions expenditure
of 2000 dollars) {trillions of 2000
' dollars) a) To calculate aggregate expenditure, for each level of real GDP sum consumption
expenditure plus investment plus government purchases. The above table has the answers for each level of real GDP.
b) Equilibrium real GDP is $800 billion because that is the level of real GDP that equals aggregate planned expenditure. ﬁﬁ mﬁ'ﬁﬁwtmﬁﬁ Wit mamw N Ln *0 D (J C3 3 6 9 l2
Reel GDP {trillions of 2000 dollars] Aggregate expenditure {trillions of 2000 dollars} 'Eiﬁéwtﬁi’m 5) The above figure shows the AE curve and 45'“ line for an economy.
a) If real GDP equals $6 trillion, how‘ do firms‘ inventories compare to their planned _ ‘l inventories? £3
b) If real GDP equals $12 trillion, how do firnis' inventories compare to their planned inventories? c) What is the equilibrium level of expenditure? Why is this amount the equilibrium? Answer: a) it real GDP equals $6. trillion, aggregate expenditure exceeds GDP and so firms'
inventories are less than planned.
b.) if real GDP equals $12trillion, aggregate expenditure is less than GDP and so ﬁrms‘
inventories are more than planned.
c) The equilibrium level of expenditure is'$9 trillion because at this level of GDP,
aggregate expenditure equals GDP. As a result, firms' inventories equal planned
inventories so firms have no incentive to either increase or decreaseproduction. 6) The slope of the AE curve is .80. What is the multiplier? Everything else the same, by how much
does equilibrium aggregate expenditure increase if
a) exports increase from $1.75 trillion to $2.25 trillion.
b.) government expenditure on goods and services decrease from $2.0 trillion to $1.8 trillion.
(1) investment increases from $1.2 trillion to $2.3 trillion. Answer: a) The change in equilibrium aggregate expenditure equals the multiplier times the
change in autonomous expenditure, which is.$0.5 trillion. So the change in equilibrium
expenditure is 5 x ($0.5 trillion) = $2.5 trillion. b) The change in equilibrium aggregate expenditure equals the multiplier times the
change in autonomous expenditure, which is —$0.2 trillion, that is, gOveinment expenditure decreases by $0.2 trillion. So the change in equilibrium expenditure is 5 x (—$0.2 trillion) = 451.0 billion. _
c) The cl'lange in equilibrium aggregate expenditure equals the multiplier times the change in autonomous exPenditure, which is $1.1 trillion. So the change in equilibrium
expenditure is 5 at ($1.1 trillion) = $5.5 trillion. 7) Suppose an economy has no income taxes or imports. if the MPC is 0.75, what doesthe"
multiplier equal? 1 , so in this case it equals 1 = ~1—~ = 4.0. : Tl lt' ‘ . —— —————
Answer 1e mu iplier equals (1 _ MPG) (1 _ 0.75} 025 8) Suppose the economy has no income taxes or imports. The MPC‘ equals 0.8. What does the
expenditure model predict will be the change in real GDP if investment increases by $200
billion? Answer: The multiplier equals m, so for the case in the question, the multiplier equals
ﬂ = 612 : 5.0. The change in real GDP equals the multiplier times the change in investment, or 5.0 x $200 billion 2 $1,000 billion. 9') Suppose the economy has no income taxes or imports. How is the size of the expenditure
multiplier related to the marginal propensity to consume? What is the multiplier if the MPG
equals 0.25? If the MPC equals 0.50? If the MPC equals 0.90? Answer: The multiplier equals , so the larger the MPC, the larger the multiplier. If the u—MPQ
MP5 is 0:25, the multiplim ism 2% = 1.3. If the MPC is 0.50, the multiplier
equals 1 1 = 2.0. And if the MPC'is 0.90, the multiplier equals w1— = u—Dsm 2636 u—nsm —~0 1m = 10.0.. 30, the larger the MPC, the larger the multiplier. Chapter 13 US. Inflation, Unemployment, and Business Cycles a $£sza§3§§ﬁSi W . 53. 0~ on.
  {3
t inﬂation rate {percent per year] LH.___H___.L...,__.L____t___._.L_
2 A. ' 6 8 10 Unemployment rote {percentage} arm465Nam»?smitemﬁwﬁiéﬁwﬁwltwwmeﬁwmemiﬁwxﬁwg HrW‘Hﬂ' 1) Suppose the natural unemployment rate is 4 percent and the expected inflation rate is 6 percent.
In the above figure, illustrate the long~run Phillips curve. What does the long~run Phillips curve
reveal abut the tang—run tradeoff between inﬂation and unemployment? Answer: mxﬁi>=.ﬁww.m:m?ms¥mmiu www' ._{;;4;w2'gg*;ﬁ§w§ug CO LRPC .a 0 4s. Inflation rote {percent per year}   _J.___L_.
2 4 6 8 l 0 Unemployment rote (percentagel
wmlmmwwmmﬂﬁﬁm '33 < The l'ong—run'Phillips curve is illustrated in the above’ﬁgure. It is Vertical at the natural
unemployment rate. The fact that the long—Ton Phillips curve is vertical means that in the
long run there is no tradeoft between inflation and unemployment. In other words, in the
long run higher inﬂation does not decrease unemployment nor does low inﬂation '
increase unemployment.  . 3 8 LRPC
e
a
'0.
E 6
a
.9;
92
E
r: 4
.9
3
E smoc2
2
SRPCI
l I l
2 4 6 8 1'0.
Unemployment rote percentage} . .k‘zn‘e ... 2) In the above figure, what factor might have lead to the shift in the. shortrun Phillips curve from
SRPC1 to SRPCZ? Answer; The long~run Phillips curve did not shift; Therefore the factor that shifted the short—run
— I Phillips Curve was an increase in the espeeted inflation rate. “Lies7 2am w,.W5.w> smnertstMmMtksansmma ma: Inflation rote (percent per yeor} 0 ' 2 4 6 a
Unemployment role {percentage} t“; 9”. six at 3; iii.3 'wv'a M sews? § 5“ www $2 maﬁa 5 iiQéQ we»: mswév’xmwm 3) In the figure above, draw a short—run Phillips curve and a long—run Phillips curve if the
1 expected inflation rate is 4 percent and the natural unemployment rate is 6 percent. Explain how
Rb the two change in the short run if:
a) slower growth in aggregate demand causes a recession.
1)) the inflation rate increases.
(2) the natural unemployment rate increases. ...
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This note was uploaded on 07/30/2008 for the course ECON 3 taught by Professor Peters during the Spring '07 term at UCSD.
 Spring '07
 Peters

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