Suppose that the federal government, holding taxes constant, increases its spending and the Federal Reserve increases its purchases of bonds. Explain in detail the short-run effects of these actions on each of the following: (i) Output and employment (ii) Prices (iii) Interest rate
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• A series of natural disasters occurs that causes the following changes in the U.S. economy:
- The real gross domestic product drops by 4 percent.
- The inflation rate rises from 5 percent to 10 percent.
Unemployment increases from 6 percent to 10 percent.
- Suppose that the federal government, holding taxes constant, increases its spending and the Federal Reserve increases its purchases of bonds. Explain in detail the short-run effects of these actions on each of the following:
(i) Output and employment (ii) Prices (iii) Interest rate
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- (a) Suppose the natural rate of unemployment for the economy is 5 percent and the economy is currently experiencing an 8 percent unemployment rate. Explain what will likely happen to wages and prices as the economy adjusts to the long-run equilibrium. (b) Using the information below, explain the adjustments that will be taken by firms and workers to move the economy to a long-run equilibrium, specifically in terms of costs of production, real and nominal wages, and prices of products. Assume that firms and workers have adaptive expectations. The current unemployment rate = 4%. The natural rate of unemployment = 5%. Last year's inflation rate = 2%. This year's inflation rate = 3%. (c) The workers in the oil and gas industry in Alberta are paid an average of $68.50 per hour, and through their collective bargaining agreement, they have incorporated a 3.5 percent annual raise in their contracts to account for anticipated inflation. Suppose there is unexpected inflation of 2.8% percent…In order to mitigate the economic impacts of the COVID-19 recession, the Government plans to run large budget deficits to improve infrastructure and build more public and transitional houses in New Zealand. Briefly describe the impact of this budget plan (with everything else held constant) on the following variables in the short run. (a) aggregate demand; (b) the price level; (c) the supply of loanable funds; (d) the real interest rate; (e) the relative attractiveness of NZD-denominated assets; (f) net foreign investment; (g) the exchange rate of the NZ dollar; (h) NZ exports (i) NZ imports; (j) the value of NZ net exports.A) Distinguish between the short run and the long run as they relate to macroeconomics. Why is the distinction important? B) Use graphical analysis to show how each of the following would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output, that prices and wages are eventually flexible both upward and downward, and that there is no counteracting fiscal or monetary policy. i) Because of a war abroad, the oil supply to the United States is disrupted, sending oil prices rocketing upward. ii) Construction spending on new homes rises dramatically, greatly increasing total U.S. investment spending. iii) Economic recession occurs abroad, significantly reducing foreign purchases of U.S. exports.
- Suppose that firms become very pessimistic about future business conditions and cut heavily on investment in capital equipment. Show the long-run equilibrium of the economy. Explain what happens to Price level and Quantity of Output in the long run equilibrium. Explain in words why the aggregate quantity of output demanded changes between the short run and the long run. [No policy involvement]recessions have occurred roughly once every six years since the 1960s. the unemployment rate usually decreases during a recession and increases shortly after the recession ends. real GDP usually remains roughly constant during a recession and decreases shortly after the recession ends. changes in real GDP over the business cycle are largely attributable to changes in investment over the business cycle. Question 2 Which of the following is most commonly used to monitor short-run changes in economic activity? Answer the inflation rate real GDP aggregate demand aggregate supply Question 3 During recessions investment Answer falls by a larger percentage than GDP. falls by about the same percentage as GDP. falls by a smaller percentage than GDP. falls but the percentage change is sometimes much larger and sometimes much smaller Question 4 The classical model is appropriate for analysis of the economy in the Answer long run, since evidence indicates that money is not neutral in the…PRICE LEVEL 160 120 80 40 0 0 100 200 300 400 OUTPUT (Billions of dollars) AD 500 600 AS the price In the short run, the increase in consumption spending associated with the stock market expansion causes the price level to level people expected and the quantity of output to the natural level of output. The stock market boom will cause the unemployment rate to the natural rate of unemployment in the short run. Again, the following graph shows a hypothetical economy experiencing long-run equilibrium at the expected price level of 120 and natural output level of $300 billion, prior to the increase in consumption spending associated with the stock market expansion. Along the transition from the short run to the long run, price-level expectations will the curve will shift to the and
- 10-8. Assume that the position of a nation's aggregate demand curve has not changed, but the long-run equilibrium price level has declined. Other things being equal, which of the following factors might account for this event? a. An increase in labor productivity b. A decrease in the capital stock c. A decrease in the quantity of money in circulation d. The discovery of new mineral resources used to produce various goods e. A technological improvementSuppose firms become very optimistic about future business conditions and invest heavily in new capital equipment. (a) Draw an AD-AS diagram to show the short-run effect of this optimism on the economy. Label the new levels of prices and output. (b) Use the diagram from part (a) to show the new long-run equilibrium of the economy. Explain in words why how the new long-run equilibrium is achieved.The Aggregate Supply (AS) curve slopes upward to reflect the profit motive of businesses. So, why are there two versions of the AS curve( i.e. short run and long- run). Discuss
- owing graph plots aggregate demand (ADar) and aggregate supply (AS) for the imaginary country of Patagonia in the year 2027. the natural level of output in this economy is $6 trillion. following graph, use the green line (triangle symbol) to plot the long-run aggregate supply (LRAS) curve for this economy. plete the table by entering the inflation rate at each potential outcome point. Calculate the inflation rate to two decimal points of precision. Unemployment Rate 3% 5% Inflation Rate LRAS AS AD ADE 12 14 16 OUTPUT (Trillions of dollars) 43 +1 Outcome C ists forecast that if the government takes no action and the economy continues to grow at the current rate, aggregate demand in 2028 will the curve labeled ADA, resulting in the outcome given by point A. If, however, the government pursues an expansionary policy, aggregate in 2028 will be given by the curve labeled ADg, resulting in the outcome given by point B. >wing table presents projections for the unemployment rates that would…2) Assume that the United States economy is currently in long-run equilibrium. a) Draw a correctly labeled graph of aggregate demand and aggregate supply and show each of the following. i. The long-run aggregate supply curve ii. The current equilibrium output and price levels, labeled as YE and PLE. b) Assume that the government increases spending on national defense without raising taxes. i. On your graph in part (a), show how the government action affects aggregate demand. ii. How will this government action affect the unemployment rate in the short run? Explain. c) Assume that the economy adjusts to a new long-run equilibrium after the increase in government spending. i. How will the short-run aggregate supply curve in the long-run equilibrium compare with that in the initial long-run equilibrium in part (a)? Explain. ii. On your graph in part (a), label the new long-run equilibrium price level as PL2.Now adjust the graph to show the new long-run equilibrium. What causes the economy to move from its short-run equilibrium to its long-run equilibrium? The government increases taxes to curb aggregate demand. The government increases spending to increase aggregate demand. Nominal wages, prices, and perceptions adjust downward to this new price level. Nominal wages, prices, and perceptions adjust upward to this new price level. Which of the following is true according to the sticky-wage theory of aggregate supply as a result of the decrease in the money supply? Check all that apply. Nominal wages at the initial equilibrium are equal to nominal wages at the new short-run equilibrium. Nominal wages at the initial equilibrium are less than nominal wages at the new long-run equilibrium. Real wages at the initial equilibrium are equal to real wages at the new short-run equilibrium. Real wages at the initial equilibrium are equal to real wages at the new long-run equilibrium. Judging by the…
