PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 12, Problem 4RQ
To determine
Effects of recession in the natural rate of
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If a firm believes that their relative price has changed, then they will increase their output, since their
product is more valuable (in relative price terms). Thus, the output of firms will be Y = Y +x (P - EP)
where alpha is the relative increase in work driven by an increase in expected price level
Thirty percent of firms can adjust their prices ex-post. If a=1, and the current price level is $200,
then draw the SRAS curve around the potential output of $10,000. Then, determine the increase
in price above expectation if 40% of firms are sticky-price firms, flexible price firms respond with
a=0.02 and Y rises by $2400.
Recent data from the Bureau of Labor Statistics show that the average price level for consumers rose 5.4% over the past year. While some are expressing concern over rising inflation leading the economy to “overheat,” there is some evidence indicating that this is due to the reopening of the economy as producers adjust to rising demand for goods and services. Many of the goods with the largest price increases, like bacon or cars and trucks, cannot have their production ramped up as quickly as demand is increasing. Other industries are facing supply chain challenges, like shortages of truck drivers. These problems are most likely to be short term, so, as supply catches up with demand, we can expect to see prices return to normal.
As evidence, after spiking to record highs in early summer, lumber prices have now fallen below their price at the start of the year. The reason for the dramatic price increase earlier in the year was a combination of reduced supply in 2019 and a surge in demand…
Explain, using the AD-AS model, the effect of an increase in investment in the macroeconomy on the equilibrium price level and the equilibrium level of output.(10)
Chapter 12 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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- Your Policy Brief team has modelled the effects of an investment in Research & Development (R&D) that leads to the invention of a new production method which makes more efficient use of renewable energy sources. This new production method can be disseminated throughout the economy, bringing down production costs for businesses, and enabling the economy to make more productive use of existing resources. This brings an expansion in the economy’s productive capacity. Illustrate the predicted effects of this innovation using an AD-AS diagram. Provide bullet points to explain what is happening in your diagram. As with all of your diagrams, be sure to indicate the original and new equilibrium points, and what happens to output and price level. To conclude your explanation, explain what the link between innovation and economic prosperity and wellbeing is.arrow_forwardSuppose that the level of unemployment in the economy is determined by the follow equation: U = 5.24 - 1.87*(i - ie) Where U is the unemployment rate, i is the actual inflation rate, and it is the expected inflation rate. All variables are entered in percentage form (e.g. if inflation is 30.57%, you plug in 30.57 for i, not 0.3057). Last year, the inflation rate was 5.24%, and people have adaptive expectations. What does the inflation rate need to be this year in order for the unemployment rate to be 3.01%? Note: Everything is already in percentage form. You do not need to multiply or divide by 100 at any point. Enter in your answer as it is calculated in the equation. Round your final answer to two decimal places.arrow_forwardAD3 AS AD2=880 P3 AD1 1.1 1.0 704 Q2 Q3 1000 1) What is the full employment level of GDP for this economy? 2) What is the rate of inflation if the economy moves from AD2 to AD3? 3) How much money must be spent to move the economy to full employment?arrow_forward
- Assume that Co = 40, G = 220, T = 120, I = 150, X = 44, Z = M = 54, b = mpc = .75 and t =.25, the actual unemployment rate = 5.7%, and the natural unemployment rate is 5.1%. A one dollar increase in T will cause Y to decrease by dollars. -$1.91 -$1.71 -$1.51 -$1.31 -$1.11arrow_forwardPRICE LEVEL (CPI) The following graph represents the short-run aggregate supply curve (SRAS) based on an expected price level of 150. The economy's full- employment output level is $9 trillion. Major unions across the country have recently negotiated three-year wage contracts with employers. The wage contracts are based on an expected price level of 150, but the actual price level turns out to be 100. Show the short-run effect of the unexpectedly low price level by dragging the curve or moving the point to the appropriate position. 300 SRAS[150] 250 SRAS[150] 200 150 100 50 0 1 0 3 6 9 12 15 18 REAL GDP (Trillions of dollars) ? Interpret the change you drew on the previous graph by filling in the blanks in the following paragraph: The lower-than-expected price level causes firms to earn profit than they expected on each unit of output they produce, and, therefore, they than workers and firms their production level. At the same time, the real value of wages and other resource prices is…arrow_forwardMacropoland, a country that is a natural gas and oil importer, has a natural rate of unemployment (at the full employment level of GDP) that is about 4.5%, and the long run average rate of inflation over time has been about 2%. However, during the period 1973-1974, the country experienced an inflation rate of about 15% while simultaneously experiencing unemployment of nearly 13%.At the present time, Macropoland is experiencing very sluggish consumption and investment (a result of a fall in the housing market), and unemployment has again edged up to around 9%. Inflation is very low at 0.4%.Macropoland has just hired you as their economic advisor. You have a big job ahead of you. Using your knowledge of aggregate demand and aggregate supply, can you explain what happened in these two time periods?Develop a response that includes examples and evidence to support your ideas, and which clearly communicates the required message to your audience. Organize your response in a clear and logical…arrow_forward
- Q.1.5 If the inflation rate is 6% and Susan receives a 6% increase in income, then, over the year, Susan's: (a) Real and nominal income both remain unchanged; (b) Real and nominal income both rise; (c) Real income rises but nominal income remains unchanged3; (d) Nominal income rises but real income remains unchanged. Q.1.6 Given the import function, Z = 300 + 2/3Y, which of the following statements is correct? (a) The marginal propensity to save is 1/3; (b) The induced component is 300; (c) 2/3 is the proportion of any income spent on imports; (d) None of the statements is correct. Q.1.7 An increase of R5 billion in income in a macroeconomy leads to an increase in R3 billion in consumption spending. From this information, we can determine that the marginal propensity to save in this economy is: (a) 0.6; (b) 0.5; (c) 0.3; (d) 0.4. Q.1.8 Mr Brown has recently been retrenched. The firm he worked for had to retrench a number of staff due to the downturn in the economy. Mr Brown has not…arrow_forwardAn economy has an unemployment rate of 11% and real GDP grows by 2.5% annually. A treasury official says next year's expected growth rate of 4% is ecpected to bring down the enemployment rate to 8% within one year. However, an economists disagrees as it is non consistent with macroeconomic research. -who is correct? the treasury official or the economist and why?arrow_forwardWhen a recession begins and ends is determined by the Business Cycle Dating Committee (chaired by our textbook author Robert Hall) within the National Bureau of Economic Research (NBER). The NBER concluded that the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warrants the designation of this current pandemic-driven episode in the nation as a recession. True Falsearrow_forward
- The country of Freeland has an aggregate demand curve determined by the equation M + U = 6% Freeland also has a potential growth rate of 2%. Using this information, draw Freeland's aggregate demand (AD) and long-run aggregate supply (LRAS) curves on the graph. Inflation rate (%) 12 11 10 9 8 7 6 5 4 3 2 1 0 -2 -1 0 LRAS 1 2 3 3 4 5 6 Real GDP growth rate (%) prevailing inflation rate: What is the prevailing inflation rate in Freeland? AD What is the prevailing real GDP growth rate? prevailing real GDP growth rate: 7 8 9 10 % %arrow_forwardCOVID-19 has sent the economy of Classica into recession. The finance ministry has advised the government to lower stamp duty and other purchase service charges for those wanting to buy existing houses in order to boost economic growth. As well, the finance ministry wants the government to also cut company taxes as this will lead to firms increasing their level of investment in the economy. The President of Classica has asked you, as her chief economic advisor, for your views. Would a cut in stamp duty and other purchase charges on the purchase of existing houses really boost the economy?arrow_forwardTo fight an ongoing 10% inflation, the government makes raising wages or prices illegal. However, the government continues to increase the money supply (and hence aggregate demand) by 10% per year. The economy starts at full-employment output, which remains constant. (i). Using the Keynesian AD-AS framework, show the effects of the government's policies on the economy. Assume that firms meet the demand at the fixed priced level. After several years in which the controls have kept prices from rising, the government declares victory over inflation and removes the controls. What happens? (ii).arrow_forward
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