Exploring Macroeconomics
8th Edition
ISBN: 9781544337722
Author: Robert L. Sexton
Publisher: SAGE Publications, Inc
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Chapter 14, Problem 12P
To determine
To explain:
The type of effect and change in the slope of the short-run
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In the foreign exchange market, value of the dollar has fallen. Simultaneously, businesses are feeling hesitant to undertake new real investment (“animal spirits” are down) and households are nervous about the future (Consumer Confidence Index is down) and are cutting back on consumption while they save more. What happens to the Aggregate Demand and Aggregate Supply curves of the U.S.?
1. Aggregate Supply does not change. AD has two opposing effects: exports rise due to the fall in the dollar, and both investment and consumption fall. It is not clear which effect is stronger. AD can move either to the left or to the right.
2.Aggregate Supply does not change. AD has two effects on it. Exports fall due to the fall in the dollar, and both investment and consumption also fall. AE falls and AD shifts to the left.
3.Aggregate Supply does not change. AD has two effects on it. Exports rise due to the fall in the dollar, and both investment and consumption also fall. AE falls and…
Suppose the government provides incentives (e.g. lower company tax) to firms that engage in high levels of research and development.How would this affect firms’ allocation between different types of investment? Explain.
How would this affect the interest rate? Explain. What happens to the quantity of investment overall? Explain.What happens to the short-run aggregate supply curve? Explain. What happens to the long-run aggregate supply curve? Explain. What happens to the value of the dollar? Explain.g What happens to the quantity of net exports demanded? Explain.h What happens to aggregate demand? Explain.
q. Consider the following scenarios and briefly explain how each scenario would affect short-run aggregate supply (SAS), long-run aggregate supply (LAS) or aggregate demand (AD) in Canada. In some situations, more than one may be affected.
1. Canada produces larger number of university graduates who possess higher levels of education and skill.
2. Depletion of resources cause increase in the prices of key inputs in production.
3. Canada’s trading partners experience higher rates of economic growth.
4. Increase in oil prices raises the value of Canadian dollar.
Chapter 14 Solutions
Exploring Macroeconomics
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- Assume that you live in a country that is a major importer of Russian oil. How will the Russian invasion of Ukraine and subsequent international sanctions against Russian exports affect your nation. a. What curve would shift first in an Aggregate Demand Aggregate Supply model for your country? b. How would the aggregate price level and aggregate output level change in the short run? What is this phenomenon called?arrow_forwardThis graph shows the short-run aggregate supply curve (SRAS) of a hypothetical economy where the currency is the dollar. Last year, the economy was producing at point A. The price level was 145 and the quantity of real GDP supplied was $500 billion. This year, the economy is producing at point B. The price level has fallen to 135 and the quantity of real GDP supplied has fallen to $300 billion and nominal wages were constant as the price level changed. Government officials are confused about why the quantity of output moved from point A to point B, and they ask you for help. Short-Run Aggregate Supply 160 SRAS 155 150 145 140 135 130 125 120 100 200 300 400 500 600 700 800 REAL GDP (Billions of dollars) Since nominal wages were constant as the price level changed, you explain that a decrease in the price level leads to in real wages. This, in turn, leads to which of the following? O Workers mistakenly believe that their real wages have risen and supply more labor. O Firms hire fewer…arrow_forwardThe following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $300 billion. Suppose households suddenly begin to spend less and save more in order to increase saving for retirement. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the sharp increase in saving. PRICE LEVEL 240 200 160 120 8 40 0 0 100 200 300 400 OUTPUT (Billions of dollars) AS AD 500 600 AD AS A In the short run, the decrease in consumption spending associated with the increase in saving causes the price level to price level people expected and the quantity of output to the unemployment rate to the the natural level of output. The sharp increase in saving will cause the natural rate of unemployment in the short run.arrow_forward
- Post your findings on the differences between short-run and long-run aggregate demand and between short-run and long-run aggregate supply. Post your explanatory notes on the comparison and contrast of aggregate demand and aggregate supply in terms of creating short-run and long-run equilibrium.arrow_forwardExplain why the aggregate demand curve slopes downwardand the short-run aggregate supply curve slopes upward.arrow_forwardWhich of the following help to explain why the aggregate demand curve slopes downward? a. When the domestic price level rises, our goods and services become more expensive to foreigners. b. When government spending rises, the price falls. c. There is an inverse relationship between consumer expectations and personal taxes. d. When the price level rises, the real value of financial assets (like stocks, bonds, and savings account balances) declines. Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregagte supply curve. a. A vertical line b. The price level is fixed c. Output prices are flexible, but input prices are fixed d. A horizontal line e. An upsloping curve f. Output is fixed What effects would each of the following have on aggregate demand or aggregate supply, other things equal? In each case, use a diagram to show the expected effects on the equilibrium price level…arrow_forward
- The aggregate demand curve slopes downward because at lower price levels the purchasing power of consumers' assets which real wealth.arrow_forwardExplain fully why the aggregate demand curve has a negative slope.arrow_forwardThe following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion. Suppose a stock market boom increases household wealth and causes consumers to spend more. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the stock market boom. 240 AS 200 AD 160 AS 120 80 AD 40 200 400 600 800 1000 1200 OUTPUT (Billions of dollars) In the short run, the increase in consumption spending associated with the stock market expansion causes the price level to the price level people expected and the quantity of output to the natural level of output. The stock market boom will cause the unemployment rate to the natural rate of unemployment in the short run. Again, the following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion, before the increase in consumption spending associated with…arrow_forward
- Examine the influence of government expenditure on investment in a nation. Use Jot Inc. Ltd a multinational construction company in which you are the Chief Exec of the firm that that is highly diversified and receives funds to construct highways and other government funded projects. Explain the factors that cause the Aggregate Demand curve to be downward sloping left to right.arrow_forwardWhy does the effect of a given increase in aggregate demand have a larger effect on real output in the short run, the more excess capacity exists in the economy?arrow_forwardSuppose that aggregate supply curve is shifting to the right by 2.5 percent a year. If aggregate demand is also increasing at 2.5 percent a year, what will happen to the overall price level?arrow_forward
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