fwk-rittenmacro-sm-ch07-aggregate-demand-and-aggregate

fwk-rittenmacro-sm-ch07-aggregate-demand-and-aggregate -...

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Solutions for Chapter 7, Aggregate Demand and Aggregate Supply Concept Problems 1. a. Total output will increase; price level will rise. b. Total output will decrease; price level will fall. c. Total output will increase; price level will fall. d. Total output will decrease; price level will rise. 2. An initial change in a component of aggregate demand—government purchases, for example—would cause firms selling goods and services to the government to hire additional workers or perhaps increase the average number of hours that their employees work. Incomes will rise, and higher incomes will lead to an increase in consumption. That increase in consumption will increase incomes, which will generate even more consumption. Taking into account these additional increases in aggregate demand, the aggregate demand curve will shift by more than the initial shift caused by the increase in government purchases. 3. a. Aggregate demand increases. The price level and real GDP rise. b. The short-run aggregate supply curve shifts to the right. The price level falls and real GDP rises. c. The short-run aggregate supply curve shifts to the right. The price level falls and real GDP rises. d. The aggregate demand curve shifts to the left. The price level and real GDP fall.
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4. It would shift the supply curve of labor to the right, increasing the natural level of employment and reducing the real wage. That would increase the potential level of real GDP. The short-run and long-run aggregate supply curves would shift to the right, increasing real GDP and reducing the price level. An inflationary gap would be created in the short run. 5.
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This note was uploaded on 10/09/2011 for the course ECON 103 taught by Professor Lin during the Spring '08 term at Rutgers.

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fwk-rittenmacro-sm-ch07-aggregate-demand-and-aggregate -...

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