MACROECONOMICS
14th Edition
ISBN: 9781337794985
Author: Baumol
Publisher: CENGAGE L
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Question
Chapter 10, Problem 3TY
a)
To determine
To describe: The given schedule on graph.
b)
To determine
To describe: The equilibrium
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Students have asked these similar questions
The following graph shows several aggregate demand and aggregate supply curves for an economy whose potential output is $5 trillion. The curves
are labelled a, b, c, and d. Three points on the graph are also indicated by grey stars and labelled K, L, and M.
100
90
80
M.
70
60
50
b
40
30
a
20
2
3
4
5
6
7
REAL GDP (Trillions of dollars)
Identify which curve on the previous graph corresponds to each description in the following table. If the curve described does not appear on the graph
choose Not Shown.
Description
b
Not Shown
a
Long-run aggregate supply (LRAS)
Short-run aggregate supply (SRAS) when the economy is at long-run equilibrium
Short-run aggregate supply (SRAS) when there is an inflationary gap
Short-run aggregate supply (SRAS) when there is a recessionary gap
Aggregate demand (AD)
PRICE LE VEL
The following graph shows a decrease in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the left from AD1AD1 to AD2AD2, causing the quantity of output demanded to fall at all price levels. For example, at a price level of 140, output is now $200 billion, where previously it was $300 billion.
The following table lists several determinants of aggregate demand.
Complete the table by indicating the change in each determinant necessary to decrease aggregate demand.
Change needed to decrease AD
Wealth
(increase/ decrease)
Taxes
(increase/ decrease)
Expected rate of return on investment
(increase/ decrease)
Incomes in other countries
(increase/ decrease)
You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) exports = $20 billion, imports = $40 billion. If the full-employment level of GDP for this economy is $700 billion. Marginal Propensity to Consume (MPC) of the economy is 0.5. How much government purchases would be closing the GDP-gap here? Explain your answer, and show your calculation.
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- Assume the Potential GDP is $15 trillion dollars. Use the table below to answer the following questions. Assume all values represent trillions of dollars. Use the table to create two graphs: 1. aggregate expenditure model and 2. an aggregate supply aggregate demand model. Note that the equilibrium in the table above will determine your real GDP and your potential GDP should be plotted in both graphs. What type of macroeconomic equilibrium does this economy reflect? Note that the multiplier is 2 because this economy has imports. If Investment expenditures increase by $2.5, how much does GDP increase? Does the increase in investment expenditures from part C result in a full employment equilibrium? Why? Graphically show the effects from part C in our Aggregate Expenditure Model and Aggregate Supply-Aggregate Demand Model.arrow_forwardPart B: Aggregate Demand (AD) Curve shows the relationship between the economy’s price level and real GDP demanded. In other words, real GDP demanded by different groups of buyers, i.e., Consumers (C), Businesses (I), Government (G), and Net Amount by Foreigners (Export - Import), at different price levels give us points on a graph, which are connected to form a curve called AD curve. Review the textbook chapter, and conduct internet research to discuss determinants of AD or factors that shift AD curve.arrow_forwardAnswer the following questions, which relate to the aggregate expenditures model:a. If Ca is $100, Ig is $50, Xn is -$10, and G is $30, what is the economy’s equilibrium GDP?b. If real GDP in an economy is currently $200, Ca is $100, Ig is $50, Xn is -$10, and G is $30, will the economy’s real GDP rise, fall, or stay the same?c. Suppose that full-employment (and full-capacity) output in an economy is $200. If Ca is $150, Ig is $50, Xn is -$10, and G is $30, what will be the macroeconomic result?arrow_forward
- can you please answer strating form D to F Given the information below, answer the questions that follow. C = $40 + 0.8Y I = $30 G = $40 X – M = -$10 a) What is the equilibrium GDP? Explain why $550 is not the equilibrium. b) What is the marginal propensity to consume (MPC) in this question? (Explain) c) What is the multiplier in this question and explain the significance of the multiplier? (Show all work) d) Assuming that the full employment level of output is $600, what kind of gap exists and how large is it? Explain e) If transfer payments increased by $10 and the price level did not change, what would the new equilibrium be? (Show all work) f) How would your answer to part (e) change if the price level did change?arrow_forwardExplain, in detail, how the adjustment to macroeconomic equilibrium occurs when spending is less than production. Be sure to discuss how inventories play a crucial role in the adjustment process. State what happens to GDP and employment during the adjustment process.arrow_forwardIllustrate how the information from the Income-Expenditure model is embedded in the Aggregate Demand curve. In your illustration, use two graphs and three aggregate price levels, P1 < P2 < P3.arrow_forward
- Suppose the money market for some hypothetical economy is given by the following graph, which plots the money demand and money supply curves. Assume the central bank in this economy (the Fed) fixes the quantity of money supplied. Suppose the price level decreases from 150 to 125. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. Money Supply 15 12 4 Money Demand 3 5 10 15 20 MONEY (Billions of dollars) INTEREST RATE (Percent) 18 0 0 25 30 Money Demand Money Supply (?) Following the price level decrease, the quantity of money demanded at the initial interest rate of 9% will be supplied by the Fed at this interest rate. As a result, individuals will attempt to bonds and other interest-bearing assets, and bond issuers will realize that they restored in the money market at an interest rate of than the quantity of money their money holdings. In order to do so, they will interest rates until equilibrium isarrow_forwardConsider the table on the right, which shows business investment in inventories for each quarter from the first quarter of 2007 to the first quarter of 2012, measured in millions of 2007 dollars. Provide a macroeconomic explanation for this pattern. (Hint: When did the recession during this period begin and end?) The negative growth of inventories indicates a period of OA. inflation since inventories needed to be reduced in the face of increasing storage cost OB. recession because demand was met by drawing down past inventories and production did not increase. OC. recovery since inventories needed to be used to meet demand. OD. recession because inventories increased due to lack of demand Year 2007 2008 2009 2010 2011 2012 2013 Quarter Q1 308889 Q2 Q3 Q4 R288828 Q1 Q2 Q3 Q4 Q1 228892889 Q2 Q3 Q4 Q1 Q2 Inventory Investment (millions of 2007 dollars) $3360 - 2822 15,570 19,644 6061 9512 11,856 4699 -2364 7779 -4807 - 4807 2663 2508 4841 -6805 8965 12,153 6462 2179 2061 7298 14,091 3875…arrow_forwardSuppose an economy is operating at point A on the graph showing aggregate demand. A decrease in the aggregate price level causes the economy to move to point B On the graph showing aggregate expenditures (AE), show the change caused by the movement from point A to point B on the aggregate demand curve. Aggregate price level Aggregate demand Aggregate output Aggregate expenditures Income (Y) Y-AE AEarrow_forward
- The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that a = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $60 billion of real GDP and that people expect a price level of 110. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 100, 105, 110, 115, and 120. (? 125 120 AS 115 110 105 LRAS 100 W 95 90 85 80 75 10 20 30 40 50 60 70 80 100 06 OUTPUT (Billions of dollars) The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level the price level that people…arrow_forwardThe Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that a = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 95. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 85, 90, 95, 100, and 105. PRICE LEVEL 125 120 115 110 105 100 95 90 85 80 75 0 + 10 20 ¶¶ 30 40 50 60 70 OUTPUT (Billions of dollars) + 80 90 100 -O AS LRAS (?) The short-run quantity of output supplied by firms will rise above the natural level of output when the actual price level falls…arrow_forwardIdentify the direction of the change during a recession in each of the following: consumption expenditures, investment expenditures, and unemployment.arrow_forward
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