MACROECONOMICS FOR TODAY
10th Edition
ISBN: 9781337613057
Author: Tucker
Publisher: CENGAGE L
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Chapter 16.A, Problem 2SQP
(a)
To determine
Economy in equilibrium with recessionary gap.
(a)
To determine
Long-run equilibrium.
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In a carefully labelled diagram, draw an economic equilibrium in the Keynesian range of the aggregate supply curve.
2. Describe a situation that would cause the AD curve to shift to the right.
3.Draw the new AD curve in your diagram above and mark the new equilibrium.
Complete the following table by matching the macroeconomic assumptions about aggregate supply to the appropriate school of thought.
Assumption
Classical
Keynesian
Only an increase in aggregate demand can move an economy out of a recession and back to potential real GDP quickly.
Product prices and wages tend to be inflexible.
The following graph shows the aggregate demand (ADAD) and aggregate supply (ASAS) curves for a hypothetical economy that is currently operating below its full-employment output level. That is, the economy is currently in a recession.
The aggregate supply curve (ASAS) in this diagram is consistent with the view of aggregate supply. According to this viewpoint, the government should spending in response to the recession.
Shift the appropriate curve on the graph to illustrate the impact of this change in government spending.
ADASPRICE LEVELREAL GDP (Trillions of dollars)AD AS
The prescribed…
PRICE LEVEL
Complete the following table by matching the macroeconomic assumptions about aggregate supply to the appropriate school of thought.
Assumption
Keynesian
Classical
Product prices and production costs are flexible.
Only an increase in aggregate demand can move an economy out of a recession and back to potential real GDP quickly.
The following graph shows the aggregate demand (AD) and aggregate supply (AS) curves for a hypothetical economy that is currently operating
below its full-employment output level. That is, the economy is currently in a recession.
The aggregate supply curve (AS) in this diagram is consistent with the
government should
spending in response to the recession.
view of aggregate supply. According to this viewpoint, the
Shift the appropriate curve on the graph to illustrate the impact of this change in government spending.
REAL GDP (Trillions of dollars)
AD
AD
AS
AS
?
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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- This question considers the impact of a tax decrease in the AD-AS framework. The figure depicts an economy in which output equals potential. Suppose that the government gives households a tax rebate. 1.) Using the line drawing tool, draw the short-run effect of the government giving households a tax rebate. Properly label this line. 2.) Using the point drawing tool, plot the new short-run equilibrium. Label this point 'e₁'. Carefully follow the instructions above and only draw the required objects. Price Level LRASO eo Real GDP, Y ($, Trillions) SRASO ADO Select Line Pointarrow_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_forwardIn order to break stagflation, the government has to increase expenditure on food subsidies in the form of food vouchers, unemployment benefits or allowances, wages subsidy to increase household consumption expenditure and boost up the AD. With increased consumption expenditure, aggregate demand will rise, which would send a signal to the aggregate supply (AS) to raise production. This will create a positive effect, which will bring the economy out of recession. Show this in a graph.arrow_forward
- In the following figure, the economy is initially in equilibrium at full-employment at point “e”. Assume that consumption falls by 100 leading to a shift in AD from AD1 to AD2. What is the new short-run macroeconomic equilibrium price and output? How large is the spending multiplier if there were no changes in the aggregate price level? How large is the spending multiplier if the aggregate price level adjusts to the new equilibrium?arrow_forwardthe following holds in an economy: YP = $20 Trillion, YActual = $20 Trillion, MPČ = 0.6, SRAS is perfectly elastic. a) Use an AD-AS diagram to depict the economic scenario described. b) Suppose there is a $0.2 Trillion increase in autonomous consumption spending. Further suppose there are no taxes. What would be the ultimate effect on YActual? Draw a new diagram to depict this shock and resulting short-run macroeconomic equilibrium. c) Again suppose there is a $0.2 Trillion increase in autonomous consumption spending (starting from the baseline case you depicted in part a). Further suppose there are taxes and the tax rate is 30%. What would be the ultimate effect on YActual? Draw a new %3D diagram to depict this shock and resulting short-run macroeconomic equilibrium. d) Use answers to parts b) and c) to comment on how taxes act as automatic stabilizers in an economy.arrow_forwardSuppose the aggregate demand (AD) and short-run aggregate supply (AS) schedules for an economy whose potential GDP (LRAS) equals to $2,700 are given by the table. State the short-run equilibrium price level and real GDP. According to the macroeconomic perspectives, is there an inflationary or a recessionary gap? If so, how much is the output gap?arrow_forward
- At the end of the fourth quarter of 2022 (December 2022) was the United States economy operating in the Keynesian, intermediate, or neoclassical portion of the economy’s Short Run Aggregate Supply Curve? Explain. Compare the overall state of the economy at the end of 2022 (fourth quarter) to the fourth quarter of 2019 which you described in your Chapter 11 Discussion. * For the Chapter 11 discussion for the fourth quarter of 2019, I said that the economy was acting in neoclassical. This was my discussion post from last time: Potential GDP is defined as the amount of real GDP an economy can produce by fully employing its existing levels of labor, physical capital, and technology in the context of its existing market and legal institutions. The non-cyclical natural rate of unemployment is defined as the lowest level that a healthy economy can sustain without creating inflation. Before the spread of the pandemic, the state of the U.S. economy at the end of the 2019 before the spread of…arrow_forwardConsider the economy represented by the aggregate demand-aggregate supply diagram, where the economy is not at full employment. Note that AD represents aggregate demand, AS represents aggregate supply, LRAS represents long-run aggregate supply and SRAS represents short-run aggregate supply. Which policy is one that a Keynesian economist might suggest to the government? eliminate quotas on imported goods increase taxes on consumers reduce government spending on bridges and roads the government builds an island off of the coast of Maryland decrease the rent because the rent is too high Show what happens in the short run on the graph if the policy moves the economy too far and the economy reaches higher than full employment. Price level Real GDP LRAS AD SRASarrow_forwardFigure 1: Hayek’s (Classical) AD-AS Model Economics Online. (n.d.). Aggregate Demand. Retrieved from http://economicsonline.co.uk/Managing_the_economy/Aggregate_demand.html Hayek says that markets will heal themselves and that government should not intervene. How does the AD-AS model reflect Hayek’s idea that governments cannot increase real GDP beyond the level that the free market economy is able to produce? Do you believe that the Hayek’s classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not? Figure 2: Keynes’s AD-AS Model Economics Online. (n.d.). Aggregate supply. Retrieved from http://www.economicsonline.co.uk/Managing_the_economy/Aggregate+supply.html 2.1. In Figure 2 above, what are the factors that may cause the aggregate demand to shift from AD to AD1? What is the difference between demand pull inflation, cost push inflation and recession? 2.2. In macroeconomics, the immediate short run is known as a length…arrow_forward
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