Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN: 9781337091985
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 17, Problem 8PA
Sub part (a):
To determine
The changes in aggregate
Sub part (b):
To determine
The changes in aggregate supply and demand on aggregate supply curve, aggregate demand curve, and Phillips curve.
Sub part (c):
To determine
The changes in aggregate supply and demand on aggregate supply curve, aggregate demand curve, and Phillips curve.
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Students have asked these similar questions
As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand
caused by the housing and financial crises and a decrease in short-run aggregate supply caused by
rising commodity prices.
Starting from a long-run equilibrium, illustrate the effects of these two changes on aggregate
supply and aggregate demand on the following graph. Then, on the subsequent graph, indicate
what happens on a Phillips-curve diagram.
LRAS
Aggregate Supply
Aggregate Demand
XE
0
LRPC
SRPC
Unemployment Rate
Price Level
Inflation Rate
Quantity of Output
Aggregate Demand
Equilibrium output will rise.
The effect on the inflation rate will be ambiguous.
The price level will fall.
Unemployment will rise.
Aggregate Supply
LRAS
Long-Run Equilibrium
SRPC
LRPC
Long-Run Equilibrium
(?)
Which of the following is true as a result of the two changes in aggregate demand and aggregate
supply? (Note: Do not consider the magnitudes of the shifts given on the preceding graphs. Think
only about the…
As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices.
1. Starting from a long-run equilibrium, illustrate the effects of these two changes on aggregate supply and aggregate demand on the following graph. Then, on the subsequent graph, indicate what happens on a Phillips-curve diagram. (Please use the images attached.)
2. Which of the following is true as a result of the two changes in aggregate demand and aggregate supply? (Note: Do not consider the magnitudes of the shifts given on the preceding graphs. Think only about the directions of the shifts.) Check all that apply.
-Equilibrium output will rise.
-The price level will fall.
-Unemployment will rise.
-The effect on the inflation rate will be ambiguous.
The Phillips curve represents the relationship between unemployment and inflation. You are required to think about the impact on the economy of movements along the curve. If the unemployment rate in the economy is steady at 4 percent per year, how does the short-run Phillips curve predict that the inflation rate will be changing, if at all? What will happen if the unemployment rate now rises to 7 percent per year? Assume there are no changes to inflation expectations. Provide an appropriate graph to support your discussion.
Chapter 17 Solutions
Brief Principles of Macroeconomics (MindTap Course List)
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- Aggregate demand, aggregate supply, and the Phillips curve In the year 2027, aggregate demand and aggregate supply in the imaginary country of Daisen-Oki are represented by the curves AD 2027 and AS on the following graph. The price level is currently 102. The graph also shows two potential outcomes for 2028. The first possible aggregate demand curve is given by the curve labeled AD(a) curve, resulting in the outcome given by point A. The second possible aggregate demand curve is given by the curve labeled AD(b), resulting in the outcome given by point B. Suppose the unemployment rate is 7% under one of these two outcomes and 6% under the other. Based on the previous graph, you would expect (OUTCOME A or OUTCOME B) to be associated with the higher unemployment rate (7%). If aggregate demand is high in 2028, and the economy is at outcome B, the inflation rate between 2027 and 2028 is (1.96% or 5.00% or 4.00% or 2.94%). Based on your answers to the previous…arrow_forwardDoes the Phillips curve have a positive or negative slope? Explain how this slope is derived. When will an increase in aggregate demand not result in lower unemployment rates in the short run?arrow_forwardAssume an imaginary country called Narnia. Firms in this country heavily rely on natural gas as a raw material to produce the final output. Assume a sudden fall in the price of natural gas. This shock is an event that directly affects firms' costs of production and thus the price that they charge. Describe the effects of this shock on the aggregate supply curve and on the Phillips curve of the economy of Narnia. Use a diagrammatic analysis to provide your answer.arrow_forward
- The following graph plots the long-run Phillips curve (LRPC) and short-run Phillips curve (SRPC1SRPC1) for an economy currently experiencing long-run equilibrium at point A (grey star symbol). Which of the following is true along SRPC1SRPC1? -The actual unemployment rate is 6%. -The expected inflation rate is 5%. -The actual inflation rate is 5%. -The natural rate of unemployment is 3%. Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated policy action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPC2SRPC2, the short-run Phillips curve that is…arrow_forwardThe following graph plots the long-run Phillips curve (LRPC) and short-run Phillips curve (SRPC1SRPC1) for an economy currently experiencing long-run equilibrium at point A (grey star symbol). Which of the following is true along SRPC1SRPC1? -The actual unemployment rate is 6%. -The expected inflation rate is 5%. -The actual inflation rate is 5%. -The natural rate of unemployment is 3%. Suppose that the central bank for this economy suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated policy action, actual inflation falls to 3%. On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy. Suppose that now, after a period of 3% inflation, households and firms begin to expect that the inflation rate will persist at the level of 3%. On the previous graph, use the purple line (diamond symbol) to draw SRPC2SRPC2, the short-run…arrow_forward"As the economy moves upward along its aggregate supply curve, the economy also moves upward along its short-run Phillips curve." Is the previous statement correct or incorrect?arrow_forward
- Suppose the Phillips curve is and the Aggregate Demand curve is Tt = Tt1+3ytot Yt = at 5(πt - 0.02) where at = Ot = 0 in the steady state. (a) Calculate the steady state values of output and inflation in this economy. (b) Calculate the short- and long-run responses of the economy to the following shocks (use a table to report your answers, as well as show them graphically on the AD-AS graph, as well as plot inflation and output against time): (1) A one-time decrease in ot to -0.05. (2) A one-time increase in at to 0.05 (at returns to 0 thereafter). (3) A permanent decrease in the Fed's inflation target from 0.02 to 0.arrow_forwardThe following graph plots a short-run Phillips curve for a hypothetical economy. Show the short-run effect of a contractionary monetary policy by dragging the point along the short-run Phillips curve (SRPC) or shifting the curve to the appropriate position. INFLATION RATE (Percent) 12 INFLATION RATE (Percent) 11 10 1 0 12 1 10 2 As anticipated, inflation Now, show the long-run effect of a contractionary monetary policy by dragging either the short-run Phillips curve (SRPC), the long-run Phillips curve (LRPC), or both. SRPC UNEMPLOYMENT (Percent) 2 LRPC SRPC 5 UNEMPLOYMENT (Percent) 5 SRPC and the short-run Phillips curve shifts SRPC LRPC Which of the following examples represents a cost of inflation? Check all that apply. A general decrease in purchasing power Increased variability of relative prices A coffee shop's costs to reprint its menu to reflect fluctuating prices An unintended redistribution of wealth from borrowers to lenders , highlighting the cost of fighting inflation,…arrow_forwardb) 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-warge theory of aggregate supply to explain what will happen to output and the price level in the long run(assuming no change in policy).What role does the expected price level play in this adjustment? Be sure to illustrate your analysis in a graph.arrow_forward
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