Macroeconomics
10th Edition
ISBN: 9780134896441
Author: ABEL, Andrew B., BERNANKE, Ben, CROUSHORE, Dean Darrell
Publisher: PEARSON
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Question
Chapter 10, Problem 4NP
a)
To determine
The equilibrium values of output and the price level using the AD-
b)
To determine
The equilibrium values of output and the price level using the AS-AD curve after the unanticipated increase in money supply.
c)
To determine
The equilibrium values of output and the price level using the AS-AD curve, after the increase in money supply as announced by F.
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Suppose that in 2011, the price of cotton, an input good, decreases in Microtania. Show how this event will change equilibrium output and price level by shifting either the SRAS or AD curve, and then answer the questions below.
Did equilibrium output increase or decrease?Increase/Decrease
Did equilibrium price increase or decrease?Increase/Decrease
0
$75 150 225
Investment ($)
Price Level
AS
Q₁
Real GDP
Investment
Demand
$50 100 150
Investment ($)
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Z
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-AD, (/=$100)
Refer to the above diagrams, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of
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demand curve. Given these conditions, what policy should the Fed pursue to achieve a noninflationary full-employment
level of real GDP?
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The Greek letter αα represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that α=$4 billionα=$4 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 $4 billion.
Suppose the natural level of output is $40 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.
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- Q.1.17 A decrease in the price level will: (a) shift the AS curve to the left.(b) shift the AD curve to the left.(c) shift the AS curve to the right.(d) leave both the AD curve and the AS curve unchanged.arrow_forwardGraphically show the likely short-run impact on US real GDP and aggregate price level using the AD/AS model. Explain your prediction. Which curve in the AD/AS model would a change in US consumer consumption affect? Note:- Please avoid using ChatGPT and refrain from providing handwritten solutions; otherwise, I will definitely give a downvote. Also, be mindful of plagiarism. Answer completely and accurate answer. Rest assured, you will receive an upvote if the answer is accurate.arrow_forwardConsider an economy where: Zt = c0 + c1Y1 + It Yt = Zt-1 Let c0 = 100, c1 = 0.75, and assume that the goods market is initially in equilibrium with Ẑ = Ŷ = 1200, and Î = 200. Suppose that in period t0 investment undergoes a permanent increase from 200 to 300. Find values for Yt and Zt in periods t0 + 1, t0 + 2, and t0 + 3. What are the final values for Y and Z? Please show all calculations, thanks!arrow_forward
- Q.1.10 Strikes across a wide range of industries in South Africa in the first half of 2020 can be illustrated in the AD-AS model as a: (a) Leftward shift of the AD curve; (b) Rightward shift of the AD curve; (c) Leftward shift of the AS curve; (d) Rightward shift of the AS curve.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_forwardQuantity of Output SuppliedQuantity of Output Supplied = = Natural Level of Output+α×(Price LevelActual−Price LevelExpected)Natural Level of Output+α×Price LevelActual−Price LevelExpected The Greek letter αα represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that α=$2 billionα=$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 100. 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: 90, 95, 100, 105, and 110.arrow_forward
- Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation: Quantity of Output Supplied = Natural Level of Output + a x (Price LevelActuat Price LevelExpecte 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 $50 billion of real GDP and that people expect a price level of 105. 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: 95, 100, 105, 110, and 115. ? 125 120 AS 115 110 105 LRAS 100 95 90 85 80 75 10 20 30 40 50 60 70…arrow_forwardConsider the graphical representation of the Keynesian cross for a hypothetical country, where the planned aggregate spending line is graphed against the 45° line. Suppose that, in this country, there is an autonomous increase in aggregate spending of $20 billion. Show this change on the graph. Planned aggregate spending (billions of dollars) 200 180 160 140 120 100 80 60 40 20 0 0 20 45 degree line 40 60 80 100 120 140 Real GDP (billions of dollars) Planned AB 160 180 200 What is the initial unplanned inventory investment? If the number is negative, be sure to include a negative sign.arrow_forwardDepict in the AD-AS model, an economy exhibiting a short run equilibrium with a negative output gap resulting from a decline in AD caused by falling investment spending. What is true about the level of unemployment in this circumstance? What is true about the utilization of capital in this circumstance? What are the implications of your statements in parts a and b for long run adjustments in resource prices? How will these changes in resource prices impact the economy in the long run? Depict this change in your graph.arrow_forward
- (Note: All your answers should be rounded to the nearest hundredth. Example: 12.034 =>12.03, 5.175=>5.18) For each of the following situations, use an AD/AS model to describe what happens to price levels and output in the United States in the short run. In each case assume the economy starts in long- and short-run equilibrium, and show the appropriate shifts in the AS or AD curves. Suppose that the AD and AS curves are given as: AD: AS: P=6.1-0.2 Y(GDP) P= -1 +0.15 Y(GDP) Using Excel create a spreadsheet with the column headings Y, AD,JAS, G, and T. Let's start with no change in G, and T. Fill in the spreadsheet's cells for Y= 19.0 to Y= 21.0 in increments of 0.1. What is the equilibrium GDP? What is the equilibrium P? Now, there is a decrease in Tax (T), i.e., tax cut by $1 (trillion). It is assumed that an 1 unit decrease in T shifts the AD curve to the right by 0.08 units. If P and Y (GDP) won't change immediately, what happens to the nation's output? (surplus, shortage, or no…arrow_forwardAssuming that there is no government spending or trade, an economy's GDP is the sum of domestic consumption C and investment I, i.e. Y = C+ I • Assume that I is unaffected by GDP • Assume the consumption function is C = co + c,Y • In any equilibrium aggregate demand, AD must be equal to Y, GDP. Given this model, which of the following statements is correct? This question is worth 2 marks! Select one or more: O a. The aggregate demand equation is given by AD = co + cY + I O b. c, is equal to autonomous consumption O c.if c; is a number between 0 and 1, and I+co >0 then the aggregate demand equation is a straight line that must intersect the 45 degree line at some point. O d. In a demand-driven economy the AD curve is a vertical line O e. In a demand-driven economy demand is equal to supply in equilibrium O f. In a supply-driven economy demand is equal to supply in equilibrium O g. In a demand-driven economy, supply creates its own demand O h. If the economy above is a demand-driven…arrow_forwardRecall the Keynesian Cross is the foundation to derive the IS curve. Suppose we have a simple closed economy. The cross of planned expenditure (PE) and the equilibrium condition (PE = Y) of this economy shows the equilibrium level of national output in the goods market. Here we assume the consumption (C) is a function of • C = 120 + 0.75(Y-T); Here the marginal propensity to consume (MPC) equals 0.75. Planned investment (I) is 200; government purchases (G) and taxes (T) are both 400. Use the conditions given, finish the following questions. (1) What is the equilibrium level of national income? Show step-by-step solution. Tip: recall the definition of planned expenditure (PE). At equilibrium, actual expenditure (Y) equals planned expenditure. (2) If government expenditures increase to 500, ceteris paribus (other things being equal), what is the new equilibrium income? What is the multiplier for government purchases? How much is the change of national income from the increase in…arrow_forward
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