Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 13, Problem 7E
(a)
To determine
Explain why the
(b)
To determine
The reason how economy will respond to the aggregate demand if AS curve is more steeply sloped.
(c)
To determine
The reason how the economy will respond to aggregate supply if AS curve is more steeply sloped.
(d)
To determine
Explain the kind of economic change in the economy that makes the curve to be more steeply sloped.
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Exercise 1
Consider the following scenario.
Aggregate output y at date t is specified as follows,
Yt = Tt – T +ỹ
where the trend level of output is represented by y.
The central bank's loss function is captured by
L
2
(y: – k)² +(T)
2
Where b> 0, and where k > 0 is a given parameter reflecting the normal level of
aggregate production or the target level of output. The central bank takes the public's
expectations as given. The society loss function is the same as the central bank loss
function.
Notation: y;: output/production; T: inflation rate; n: expected inflation rate; L:
loss function; b, k: constant parameters; t: time index.
2. Give an example of a favourable and unfavourable shock to the aggregate supply. Use the model of aggregate demand (AD) and aggregate supply (AS) to explain the effects of such shocks. How do these shocks affect the AD-AS curves?
(1) Suppose the economy is in long-run equilibrium. If there is a sharp increase in the expected price level, what do we expect to happen?
Select one:
(A) In the short run, the SRAS curve will shift left, real GDP and price will fall.
(B) In the short run, SRAS will shift right, real GDP will rise and prices will fall.
(C) In the short run, AD will shift left, real GDP and prices will fall.
(D) In the short run, LRAS and SRAS will shift left, causing real GDP to fall.
Chapter 13 Solutions
Macroeconomics (Fourth Edition)
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- Hi, could you help me solve this problem? It is often argued that the effect of a demand shock depends on the state of the economy. In particular, a given increase in aggregate demand may induce a larger increase in inflation (or price level) if the output gap is initially positive (output exceeds natural output) than if the output gap is initially negative. The argument is that when economy’s overall production capacity is almost fully used, firms cannot expand output much in response to an increase in demand.t Draw AD and AS curves that are consistent with these ideas and explain them briefly.arrow_forwardThe economy is depicted by the graph to the right. It is presently operating at point A. Suppose that the central bank attempts to expand the economy through purchasing US government securities. 1.) Using the line drawing and or the 3-point curved line drawing tools, show the effect of this shock, assuming the policy is not anticipated by the public. Properly label your new curve or curves. 2.) Using the point drawing tool, identify the new short-run equilibrium point. Label this point 'H'. Carefully follow the instructions above, and only draw the required objects. Price level 160- 140- 120- 100- 80- 60- 40- 0 2 4 6 Click the graph, choose a tool in the palette and follow the instructions to create your graph. LRAS SRAS 8 10 12 14 GDP ($ trillions) AD 16 18 20 O *arrow_forwardQUESTION 8 In the model: Y=v - B(r,-r)- we, + e T,- m + a(v, -v;)– yAe, + e" !! What is the expected short-run effect of a positive demand shock (6, > 0) on output? O positive O negative O neutral O ambiguousarrow_forward
- A temporary "supply shock" will Select one: a. cause AD to shift down (or decrease). b. cause AD to flatten out (smaller slope). c. cause LRAS to rotate and slope upwards at a 45-degree angle. d. cause SRAS to shift either right (if it is a good shock) or left (if it is a bad shock).arrow_forward1.True or False: Businesses and government care only about long-run economic forecasts, because they cannot adapt policy or output to accommodate short-run fluctuations. 2.Suppose the most recent data show that the average initial weekly claims for unemployment insurance have recently increased. This change suggests a )RECCESSIONARY or EXPANSIONARY) period in the coming months? 3.Economists disagree about how quickly the economy adjusts to an aggregate demand shock. In the view of some economists, people form expectations based on present realities and change expectations gradually as their experience unfolds. Such expectations are said to be rational, unexpected, adaptive, reasonable, or great ? 4. Suppose an unanticipated increase in investment spending causes the aggregate demand curve to shift to the right (from AD1AD1 to AD2AD2). According to adherents of the adaptive-expectations theory, the unanticipated change in aggregate demand will cause the economy to move in which…arrow_forward) Consumers use cash in transactions more frequently in response to an increase in identity theft. As a result of this shock, the IS [moves/doesn't move] and the LM [moves/doesn't move]. In the curve curve short run (i.e. when prices are sticky), Y. [increases / decreases], r_--[increases / decreases], C_--_[increases / decreases], planned investment decreases], the unemployment rate [increases / decreases]. If the central bank wanted to help the economy return to potential GDP, it could implement [expansionary / contractionary] monetary policy [increases /arrow_forward
- “The oil Price run-up of 2007-08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. The experience of 2007-08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.” a) Oil price shocks have an evident impact on the short run aggregate supply curve. With the help of a graph demonstrate how rising oil prices affect the SRAS and explain what other factors can cause this shift. b) Different theories attempted to explain why SRAS curves slope upwards. Identify and explain these theories explaining what they have in common.arrow_forwardUsing the ASAD graph and starting in long run equilibrium YA = Y* (see the model example in the textbook Figure 13.11) take each of following shocks one by one in separate graphs and decide if the event falls into the real shock (LRAS) category or aggregate demand (AD) shock category. Then graph each. Remember that “shocks” include both good and bad events and the graph should show that in the short run the economy is either that YA < Y* or YA > Y* A fall in the input price of oil A rise in consumer optimism A cut in business taxes if they buy new equipment Foreigners buy fewer US made goods. Consumer Fear New inventions (A) occur at a faster pace than usual A faster money growth rate A permanent cut in income taxesarrow_forwardConsider a modified aggregate supply function which takes account for the emergence of random business cycle shocks (ce) with Ele] - O in the sense that Ye - R - R ++ 6 The loss function is the same as in exercise 1: L-(n - k)* +(m)? Notation: €: random shock; E[e,]: expected value of e; b: constant parameter, all other variables see Exercise 1. Having considered the scenario above complete the following tasks: a) Derive the central bank's preferred inflation rate and explain.arrow_forward
- 1. Drought In South Africa destroyed farm crops and drove up the price of food. What Is the effect on the short-run trade-off between inflation and unemployment? 2. Give an example of a favourable and unfavourable shock to the aggregate supply. Use the model of aggregate demand (AD) and aggregate supply (AS) to explain the effects of such shocks. How do these shocks affect the AD-AS curves?arrow_forward.) Suppose people's inflation expectations are subject to ran- dom shocks: at time t-1, expected inflation in time t is Et-1t = πt-1+t-1 where n-1 is a random shock with mean zero but deviates from zero when some event beyond past inflation causes expected inflation to change. Also, Ett+1 = πt + nt.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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