Macroeconomics
13th Edition
ISBN: 9781337617390
Author: Roger A. Arnold
Publisher: Cengage Learning
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Chapter 10, Problem 19QP
To determine
Impact of increase in the AD below the natural real
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Now think about a major recession, like the one that occurred in 1982. (Hint: a major recession could be caused by a large shift to the left in the AD curve.) Why would a Keynesian policy make more sense in response to a major recession like the one that occurred in 1982? What would be the cost of following a neoclassical policy then?
Figure 2: Keynes’s AD-AS Model
Economics Online. (n.d.). Aggregate supply. Retrieved from http://www.economicsonline.co.uk/Managing_the_economy/Aggregate+supply.html
2.1. In Figure 2 above, what are the factors that may cause the aggregate demand to shift from AD to AD1? What is the difference between demand pull inflation, cost push inflation and recession?
What is the difference between the Keynesian zone, neoclassical zone, and intermediate zone in the AD/AS model? For each, predict the impact that an increase in aggregate demand would have on the price level relative to real GDP in each of those zones.
How does the AD/AS model explain economic growth, recessions, as well as changes in unemployment and inflationary pressures?
Chapter 10 Solutions
Macroeconomics
Ch. 10.1 - Prob. 1STCh. 10.1 - Prob. 2STCh. 10.1 - Prob. 3STCh. 10.2 - Prob. 1STCh. 10.2 - Prob. 2STCh. 10.2 - Prob. 3STCh. 10.3 - Prob. 1STCh. 10.3 - Prob. 2STCh. 10.3 - Prob. 3STCh. 10.4 - Prob. 1ST
Ch. 10.4 - Prob. 2STCh. 10 - Prob. 1QPCh. 10 - Prob. 2QPCh. 10 - Prob. 3QPCh. 10 - Prob. 4QPCh. 10 - Prob. 5QPCh. 10 - Prob. 6QPCh. 10 - Prob. 7QPCh. 10 - Prob. 8QPCh. 10 - Prob. 9QPCh. 10 - Prob. 10QPCh. 10 - Prob. 11QPCh. 10 - Prob. 12QPCh. 10 - Prob. 13QPCh. 10 - Prob. 14QPCh. 10 - Prob. 15QPCh. 10 - Prob. 16QPCh. 10 - Prob. 17QPCh. 10 - Prob. 18QPCh. 10 - Prob. 19QPCh. 10 - Prob. 20QPCh. 10 - Explain how to derive a total expenditures (TE)...Ch. 10 - Prob. 22QPCh. 10 - Prob. 23QPCh. 10 - Prob. 24QPCh. 10 - Prob. 25QPCh. 10 - Prob. 1WNGCh. 10 - Prob. 2WNGCh. 10 - Prob. 3WNGCh. 10 - Prob. 4WNGCh. 10 - Prob. 5WNGCh. 10 - Prob. 6WNGCh. 10 - Prob. 7WNGCh. 10 - Prob. 8WNG
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- Hayek says that markets will heal themselves and that government should not intervene. How does the AD-AS model reflect Hayek’s idea that governments cannot increase real GDP beyond the level that the free market economy is able to produce? Do you believe that the Hayek’s classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not?arrow_forwardFigure 1: Hayek’s (Classical) AD-AS Model Economics Online. (n.d.). Aggregate Demand. Retrieved from http://economicsonline.co.uk/Managing_the_economy/Aggregate_demand.html Hayek says that markets will heal themselves and that government should not intervene. How does the AD-AS model reflect Hayek’s idea that governments cannot increase real GDP beyond the level that the free market economy is able to produce? Do you believe that the Hayek’s classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not? Figure 2: Keynes’s AD-AS Model Economics Online. (n.d.). Aggregate supply. Retrieved from http://www.economicsonline.co.uk/Managing_the_economy/Aggregate+supply.html 2.1. In Figure 2 above, what are the factors that may cause the aggregate demand to shift from AD to AD1? What is the difference between demand pull inflation, cost push inflation and recession? 2.2. In macroeconomics, the immediate short run is known as a length…arrow_forwardIn the Keynesian model, which of the following events lead to an increase in aggregate demand? (This is a multiple answer question. One of more options may be correct) a. An increase in the sales tax b. A new infrastructure project by the Federal government c. An increase in value of the Euro relative to the US-Dollar d. A drop in business confidence.arrow_forward
- In the AD/AS model assume 2019 began with potential real GDP = $19.7 trillion, while actual real GDP = $19.0 trillion and the Price Level (GDP Deflator) = 210. A year later the Price Level = 214 and actual real GDP = $18.9. Based on their relative effects on the AD/AS model, which of the following scenarios best explains this new outcome? The effect of %3D Group of answer choices an increase in government spending is MORE than the effect of decreased electricity prices. an increase in wages is LESS than the effect of a decrease in government spending. a decrease in oil prices is MORE than the effect of positive consumer expectations. an increase in inflationary expectations is MORE than the effect of increased government spending.arrow_forwardAggregate Supply: Explain whether the economy is currently operating in the Keynesian, intermediate or neoclassical portion of the economy's aggregate curve. Also, point out a time when the economy may have been operating at another portion of the aggregate supply curve.arrow_forwardThe Keynesian model believes that supply creates its own demand. True Falsearrow_forward
- Suppose you are Herb Stein, Chair of Economic Advisors to President Ford. OPEC has just quadrupled the price of oil. The entire economy uses oil in manufacturing (exaggeration, but not a big one), consequently the costs reflected by the AS curve dramatically increase. Using the AD/AS model, what happens to output and prices? Same role, a recession with inflation now exists(stagflation), both are serious, 10% u/e, 14% inflation. You are thinking of proposing a solution to the recession, the negative GDP gap is $300 billion, the MPC is .75. Businesses won't increase Investment because of fear of losses You remember from your econ 101 class, that there is a multiplier effect for Government Expenditures. If you just want to fix this negative gap, how much Government expenditure would you propose? Same role, Using the AD/AS model, what would you expect to be the result of your proposal in the above question, with regard to output, and inflation? Does the degree of the shape of the AD/AS…arrow_forwardSuppose that productivity growth in Country X's economy has fallen to less than 1% per year. This has caused Country X to fall into a recession. Using the neoclassical model of AD/AS, which of the following will be most important for Country X? the growth rate of long-term productivity the problem of cyclical unemployment an increase in the annual unemployment rate O supply and demand in the labor marketarrow_forwardDo you believe that the Hayek's classical AD-AS model explains the factors that cause changes (shifts) in AS realistically? Why or Why not?arrow_forward
- What would a Keynesian likely recommend in response to a recession? What would a neoclassical likely recommend? Why would a Keynesian policy response not make much sense in response to a minor recession like the one that occurred in 1990? What would be the cost of letting the economy adjust by itself to a new long run equilibrium?arrow_forwardThank you so much for your time and effort! Please note that this is a multi part quesition! Figure 2: Keynes’s AD-AS Model (Image normally goes here) Part 1:Changes in which factors could cause aggregate demand to shift from AD to AD1? What could happen to the unemployment rate? What could happen to the inflation rate? Part 2: The Keynesian AD-AS model describes what happens with price levels when aggregate demand increases. Could you find any evidence from the last ten-fifteen years that might support AD-AS model descriptions of demand-pull inflation, cost-push inflation, and recession? For example, you could find data on the GDP’s of any two countries from 2000 to 2017 to support your findings. Please note the followong for the next 3 parts of this. In macroeconomics, the immediate short run is known as a length of time when both input prices and output prices are fixed. In the short-run, input prices are fixed but output prices are variable. In the long run, input prices and…arrow_forwardAssume the economy begins with potential real GDP = $13.7 trillion, while actual real GDP = $14 trillion and the Price Level (GDP Deflator) = 210 in the AD/AS model. A year later the Price Level = 212 and actual real GDP = $14.1. Based on their relative effects on the AD/AS model, which of the following scenarios best explains this new outcome? The effect of a(n) Group of answer choices: increase in consumer spending is MORE than the effect of a decrease in natural gas prices. increase in wages is LESS than the effect of an increase in consumption taxes. decrease in physical capital is LESS than the effect of a decrease in oil prices. increase in oil prices is MORE than the effect of negative business expectations.arrow_forward
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