Ch20 - 31-DCT—2886 121 GS 3 1 -DCT—2886 FROM HKCC (Po...

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Unformatted text preview: 31-DCT—2886 121 GS 3 1 -DCT—2886 FROM HKCC (Po lgUJ CHAPTER 20 . List and explain the three reasons the aggregate demand curve is downward sloping. . Explain why the long-run aggregate-supply curve is vertical. . V . List and explain the three theories for why the short-run aggregate-supply curve is upward sloping. . p . What might shift the aggregatedemand curve to the left? Use the model ‘of aggregate demand and PROBLEMS AND APPLICATIONS 1. Suppose that the economy is in a long-run equi- librium. a. Draw a diagram to illustrate the state of the economy. Be sure to show aggregate demand, short-run aggregate supply, and long-run aggregate, supply. b. Now suppose that a stock—market crash causes aggregate demand to fall. Use your diagram to show what happens to output and the price level in the short run. What happens to the unemployment rate? c. Use the sticky-wage theory of aggregate sup- ply to explain what will happen to output and . the price level in the long run (assuming there is no change in policy). What role does the expected price level play in this adjustment? Be sure to illustrate your analysis in a graph. . Explain whether each of the follmving events will increase, decrease, or have no effect on long-run aggregate supply. a. The United States experiences a wave of immigration. . - b. Congress raises the wage to $10 per hour. c. Intel invents a new and more pewerful com- puter chip. d. A severe hurricane damages factories along 'the East Coast. . Suppose an economy is in long-run equilibrium . a. Use the model of aggregate demand and aggregate supply to illustrate the initial equi- librium (call it point A). Be sure to include both short-run and long-run aggregate supply. b. The central bank raises the money supply by 5 percent. Use your diagram to show what 11:47 HKCC (PolgU) 7. T0 23643145 v 13.87 AGGREGATE DEMAND AND AGGREGATE SUPPLY aggregate supply to trace through the short-run and long-run effects of such a shift on output and the price level. What might shift the aggregate-Supply curve to the left? Use the model of aggregate demand and aggregate supply to trace through the short-run and long-run effects of such a shift on output and the price level. happens to output and the price level as the economy moves from» the initial to the new short-run equilibrium (call it point B). I c. Now show the new long-run equilibrium -4. (call it point C). What causes the economy to move from point B to point C? d. According to the sticky-wage theory of aggre- gate supply, how do nominal wages at point A compare to nominal wages at point 8?. HOW do nominal wages at point A compare to nominal wages at point C? __ e. According to the sticky-wage theory of aggre- gate supply, how do real wages at point A compare to real wages at point B? How do real wages at point A cOmpare to real wages at point C? _ ' f. Judging by the inipact of the money supply on nominal and real wages, is this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run? In 1939, with the US. economy not yet fully recovered from the Great Depression,-l‘resident Roosevelt proclaimed that 'Ihanksgiving would fall a week earlier than usual so that the shop-. ‘ping period before Christmas would be longer. Explain what President Roosevelt might-have been trying to achieve, using the‘ model of ' aggregate demand and aggregate supply. 5. Explain why the following statern‘ents are false. a. "The a'ggregatedemand curve slopes down- . Ward because it is' the horizontal sum‘of the demand‘curves for individual goods." P.8‘? 469 31-0CT-2886 12185 FROM HKCC CPolgU) TU 23643145 p. as 470 PART 8 b. “The long-nrn aggregate-supply curve is ver- tical because economic forces do not affect long-run aggregate supply.” c. "If firms adjusted their prices every day, then the short-run aggregate-supply curve would be horizon .” (1. "Whenever the economy enters a recession, its long-run aggregate-supply curve shifts-to the left.” .. For each of the three theories for the upward slope of the short-run aggregate-supply curve, carefully explain the following: a. How the economy recovers from a recession and-returns to its lOng-run equilibrium with- out any policy intervention. _ b. What determines the speed of that recovery. . Suppose the Fed expands the money supply, but because the public expects this Fed action, it. simultaneously raises its expectation of the price level. What will happen to output and the price level in the short run? Compare this result to the outcome if the Fed expanded the money supply but‘the public didn't change its expectation of y the price level. . Suppose that the economy iscurrently in a reces- sion. lf policymakers take no action, how will the economy change overtime? Explain in words and using an aggregate-demand/aggregate- supply diagram. « . The economy begins in long-run equilibrium. Then one day, the president appoints a new chairman of the Federal Reserve. This new chairman is well-known for his view that infla- tion is not a major problem for an economy. ' a. How would this news affect the price level that people would expect to prevail? l b. How would this change'in the expected price level affect the nominal wage that workers and firms agree to in their new labor contracts? c. How would this change in the nominal wage affect the, profitability of producing goods and services at any given price level? d. How does this change in profitability affect the short-run aggregatesupply curve? e. If aggregate demand is held constant, how does this shift in the aggregate-supply curve affect the price level and the quantity of out- put produced? \‘ t- “-.. ~. “34’. 1', chc‘" (Sofia; ‘ 10. '11. 12. 13. f. Do you think this Fed chairman was a good appointment? Explain whether each of the following events shifts the short-run aggregate-supply curve, the aggregate-demand curve, both, or neither. For each event that does shift a curve, draw a dia- gram to illustrate the effect on the economy. a. Household wealth rises as the stock market booms. ' - b. The price of crude oil rises. . c. A series of tornadoes flattens several factories in the Midwest. ‘ For each of the following events, explain the short-run and long-run effects on output and the price level, assuming policymakers take no action. a. The stock market declines sharply, reducing censurners’ wealth. b. The federal government increases spending _ V on national defense. . c. A technological improvement raises produc- tiVity. , d. A recession overseas causes foreigners to buy fewer U.S. goods. Suppose that firms become very optimistic about future business conditions and invest heavily in new capital equipment. a. Draw an aggregate-demand/aggregatesupply diagram to show the short-run effect of this optimism on the economy. Label the new lev- - els of prices and real output. Explain in words why the aggregate quantity of output supplied changes. b. Now use the diagram from part (a) to show the new long-run equilibrium of the ecOn- omy. (For now, assume there is no change in the long-run aggregate-supply curve.) Explain in words why the aggregate quantity of out- put demanded changes between the short run and the long run. c. How might the investment boom affect the ' I long-run aggregate-supply curve? Explain. In economy A, all workers agree in advance on the nominal wages that their employers will pay them. In economy B, half of all workers have these nominal wage contracts, while the other half have indexed employment contracts, so their wages rise and fall automatically with the price level. According to the sticky-wage theory SHORT-RUN ECONOMIC FLUCTUATIONS 3‘ 31-DCT-2886 12:86, FROM HKCC (PolgU) TD 23643145 , P.89 CHAPTER 20 AGGREGATE DEMAND AND AGGREGATE SUPPLY 47 of aggregate supply, which economy has a more sion and the term expansion for the period of steeply sloped short-run aggregate-supply ' growth between recessions. . curve? In which economy would a 5 percent a. What was the US. economy’s most recent increase in the money supply have a larger turning point? Is the U.S'economy now in an impact on output? In which ec0nomy would it expansion or a contraction? have a larger impact on the-price level? Explain. b. When was the most recent completed con- 14. The National Bureau of Economic Research is a - ' truth“? H0“? 101% wafiit? BY hiStOfical 5W" nonprofit econoznic research group that sets the duds: “a? ms °°ntrm°n Short 01‘ Ions? official dates for the beginning and end of reces- ‘3- when was the 3105* refer“ COmPI‘?“d expan' sions in the United States. Go to its website, 51°“? H0” long W35 it? BY historical Stan- httg: a www.nber.org, and find information daIdSr was this exPamiion 511°“ 0r 101‘8? about business cycle dating. Notice that the . NBER often uses the term contraction for a reces- 31-DCT-2286 1114B HKCC (PolgU) 997. [3.89 ...
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Ch20 - 31-DCT—2886 121 GS 3 1 -DCT—2886 FROM HKCC (Po...

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