MACROECONOMICS FOR TODAY
10th Edition
ISBN: 9781337613057
Author: Tucker
Publisher: CENGAGE L
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Chapter 16, Problem 12SQ
To determine
The impact of the shift in aggregate demand.
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The country of Merryville has an unemployment rate that is greater than the natural rate of unemployment.
Using a correctly labeled graph of aggregate demand and aggregate supply, show the current equilibrium real gross domestic product, labeled YC, and price level in Merryville, labeled PLC.
The president of Merryville is receiving advice from an economic adviser who advises the president to decrease personal income taxes. How would such a decrease in taxes affect aggregate demand? Explain.
The government of Merryville increases spending on goods and services by $200 billion, which is financed by borrowing. If the marginal propensity to consume in Merryville is 0.75:
Calculate the multiplier
What is the maximum possible change in real gross domestic product (GDP) that could result from the $200 billion increase in government spending?
Assume the Canadian economy is currently at equilibrium.
a. Using a correctly labeled aggregate demand and supply graph, show
Full employment output (yf)
Current price level (PL1)
b. World War III breaks out and Canada has to get involved. The Prime Minister chooses to increase the military budget by 40%. On your graph from part A, show what will happen in the economy, labeling the new equilibrium as Q2, PL2.
c. Using a correctly labeled graph of the loanable funds market, show how the Prime Minister’s decision will affect the economy.
Which of the following could explain why a country’s aggregate demand curve might shift inwards to the left?
a) a decrease in interest rate.
b) an appreciation of its currency.
c) a rise in government expenditure.
d) an increase in business confidence.
Chapter 16 Solutions
MACROECONOMICS FOR TODAY
Ch. 16.3 - Prob. 1.1YTECh. 16.3 - Prob. 2.1YTECh. 16.3 - Prob. 2.2YTECh. 16.A - Prob. 1SQPCh. 16.A - Prob. 2SQPCh. 16.A - Prob. 3SQPCh. 16.A - Prob. 4SQPCh. 16.A - Prob. 1SQCh. 16.A - Prob. 2SQCh. 16.A - Prob. 3SQ
Ch. 16.A - Prob. 4SQCh. 16.A - Prob. 5SQCh. 16.A - Prob. 6SQCh. 16.A - Prob. 7SQCh. 16.A - Prob. 8SQCh. 16.A - Prob. 9SQCh. 16.A - Prob. 10SQCh. 16.A - Prob. 11SQCh. 16.A - Prob. 12SQCh. 16.A - Prob. 13SQCh. 16.A - Prob. 14SQCh. 16.A - Prob. 15SQCh. 16 - Prob. 1SQPCh. 16 - Prob. 2SQPCh. 16 - Prob. 3SQPCh. 16 - Prob. 4SQPCh. 16 - Prob. 5SQPCh. 16 - Prob. 6SQPCh. 16 - Prob. 7SQPCh. 16 - Prob. 8SQPCh. 16 - Prob. 9SQPCh. 16 - Prob. 10SQPCh. 16 - Prob. 11SQPCh. 16 - Prob. 12SQPCh. 16 - Prob. 1SQCh. 16 - Prob. 2SQCh. 16 - Prob. 3SQCh. 16 - Prob. 4SQCh. 16 - Prob. 5SQCh. 16 - Prob. 6SQCh. 16 - Prob. 7SQCh. 16 - Prob. 8SQCh. 16 - Prob. 9SQCh. 16 - Prob. 10SQCh. 16 - Prob. 11SQCh. 16 - Prob. 12SQCh. 16 - Prob. 13SQCh. 16 - Prob. 14SQCh. 16 - Prob. 15SQCh. 16 - Prob. 16SQCh. 16 - Prob. 17SQCh. 16 - Prob. 18SQCh. 16 - Prob. 19SQCh. 16 - Prob. 20SQ
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- What effects would each of the following have on aggregate demand or aggregate supply? Justify your answer. In each case use a diagram to show the expected effects on the equilibrium price level and real output level in the economy. Assume that all other things remain constant and prices are inflexible downward. (a) A reduction in interest rates at each price level (b) A sizable increase in labor productivity. (c) The nation’s currency appreciates against its major trading partners .arrow_forwardSuppose that the economy of Monaco is represented by the aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) curves in the accompanying graph. a. Based on the graph, Monaco is experiencing a deflationary gap. currently at long-run equilibrium. experiencing an inflationary gap. b. Which of the following policies eliminate this phenomenon? A birth control subsidy An increase government purchases of goods and services An increase in taxes An increase in government transfers A cut in taxes c Suppose that the government implements the policy proposed in part b. Shift the aggregate demand curve on the graph accordingly. Aggregate price level LRAS 7 6 X 5 4 3 AD 2 3 10 9 8 2 1 0 0 1 4 5 6 Real GDP 7 8 SRAS 9 10arrow_forwardAssume an economy operates in the Keynesian (horizontal) range of its aggregate supply curve. For each of the following changes in conditions, state the direction of the effect on Aggregate demand, aggregate supply, price level and real GDP 1. A decrease in government expenditure in infrastructure 2. A severe recession occurs in a country, which has been a major importer 3. The federal government reduces business taxes 4.The central bank increases the cash interest rate.arrow_forward
- Which of the following would shift aggregate demand to the right? 1) The value of the dollar increases. 2) There is a decline in consumer confidence. 3) Stock market values increase by 20%. 4) College graduates are having a difficult time finding jobs. 5) A fall in the price level increases the value of real wealth.arrow_forwardQuestion 24 What happens on the aggregate demand curve when there is a rise in the price level which causes a change in the interest rate? There is an upward movement along the aggregate demand curve. There is a downward movement along the aggregate demand curve. There is no movement along the aggregate demand curve. There is a leftward shift of the aggregate demand curve. There is a rightward shift of the aggregate demand curve. Question 25 In the long run, the economy has gone through a full business cycle. at least five years have passed. some prices have adjusted. all prices have adjusted. the majority of firms are making a profit. Question 26 In the long run, the output of an economy does not grow. grows at a positive rate. depends on aggregate…arrow_forward7) Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand curve? A) They will move the economy up along a stationary aggregate demand curve. B) They will move the economy down along a stationary aggregate demand curve. C) They will shift the aggregate demand curve to the right. D) They will shift the aggregate demand curve to the left.arrow_forward
- An increase in aggregate demand will create a permanent increase in real GDP. True Falsearrow_forward#2a: As you have learned consumer expectationsLinks to an external site. are a major driver of the short run path of the economy. Consumer spending accounts for about 68% of GDP and consumer sentimentLinks to an external site. is a major factor in shifting Aggregate Demand. Do you expect consumer confidence and business expectations to improve in the months ahead? Utilizing the equation GDP= C+I+G+ (X-M) from Chapter 6 what is your forecast for the way the AD curve will shift between now and the end of 2023? Explain. Do you anticipate a recession between now and the end of 2023?arrow_forwardConsider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand curve (AD) and short-run aggregate supply curve (SRAS) for the economy. The long-run aggregate supply curve (LRAS) is represented by a vertical line at $6 trillion. The economy is initially producing at potential output. Suppose that fiscal authorities decide to increase marginal tax rates. Assume that this change in marginal tax rates is perceived as a long-term change. Shift the appropriate curves to illustrate the supply-side view of the fiscal policy effect on output and the price level. PRICE LEVEL 120 100 80 40 20 0 0 LRAS SRAS AD 2 4 6 8 10 QUANTITY OF OUTPUT (Trillions of dollars) 12 AD SRAS LRAS ? True or False: Supply-side economics is a long-run, growth-oriented strategy.arrow_forward
- other things equal, which of the following would be expected to shift aggregate demand to the right? 1. A decrease in the price level 2. Many of our major trading partners experience a recession 3. A decline in business confidence about future growth 4. an increase in home values.arrow_forwardConsider a closed economy, where wages are sticky in the short run. The consumption function is C = co+c₁(Y-T), where the marginal propensity to consume c₁ is equal to 0.8. Initially the economy is in equilibrium at Y = Y* and P = Pº, where Pe is the price level that was expected when agents agreed their fixed nominal wage contracts. The short-run aggregate supply curve (SRAS) is horizontal. Suddenly the government increases government spending G by $200. For the following questions, if you think a variable goes up by (say) $50, just enter 50 as your answer. If you think a variable goes down by $50, enter -50 as your answer. If you think a variable doesn't change at all, enter 0 as your answer. 10. By how much will output Y change in the short run? 11. By how much will consumption C change in the short run? 12. By how much will investment I change in the short run? 13. By how much will output Y change (compared to its initial level before the change in G) in the long run, after wage…arrow_forward(b) Assume that no policy action is taken. a. Show on your graph from part (a) the change in short-run aggregate supply that will return the economy to the natural rate of output. Explain why this happens. b. Label the new equilibrium output and price levels.arrow_forward
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