MACROECONOMICS FOR TODAY
10th Edition
ISBN: 9781337613057
Author: Tucker
Publisher: CENGAGE L
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Chapter 16.A, Problem 4SQP
(a)
To determine
Economy with equilibrium with inflationary gap- classical view.
(a)
To determine
Economy with equilibrium in the long-run.
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Figure 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…
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…
If the intersection of AD and SRAS occurs at $21 trillion GDP but full employment GDP (LRAS) is at $22 trillion GDP, which of the following policy choices would help move the economy toward full employment?
a) Lowering income taxes and payroll taxes for all employees.
b) All of the choices would help increase AD and bring the economy closer to full employment.
c) increasing the money supply to lower interest rates.
d) Increases government spending on infrastructure.
e) Sending out stimulus checks to everyone earning less than $100,000 per year.
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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Similar questions
- 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.arrow_forwardAggregate Supply: Explain whether the economy is currently operating in the Keynesian, intermediate or neoclassical portion of the economy's aggregate curve. Also, point out a time when the economy may have been operating at another portion of the aggregate supply curve.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_forward
- Respond to the following in a minimum of 175 words: Explain the shape of aggregate demand curve. How do Classical and Keynesian economists differ in their view of the aggregate supply curve? Discuss how the economy returns to equilibrium in response to changes in aggregate demand (AD) and aggregate supply (AS) in both the short run and long run.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_forwardIn the 1960s the U.S entered the Vietnam War, and military expenditures (part of government expenditures) grew from an annual rate of $113 billion to 138 billion. The economy was near full-employment and, therefore, given there was no offsetting tax increase, inflation pressures emerged. Assume the MPC is .75 A) How did the increase in military expenditures affect AD? B) If in 1968 the AD Excess was $150 billion, what change in government expenditures would you have recommended?arrow_forward
- Consider 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_forwardAssuming these graphs illustrate the implementation of expansionary macroeconomic policy that increases the total desired spending from AEo to AE1 – the equivalent of shifting the AD curve from ADo to AD1, what else about can be gleaned from the situation depicted? There are multiple answers e) Inflation increases the impact of expansionary policy. d) The resulting increase in equilibrium real GDP will be smaller because the inflation dissipates part of the impact of the original increase in expenditures, thus reducing the autonomous pending multiplier. c) The inflation caused by the shift in AD and an upward sloping AS curve will be reflected in a decrease in AE shown by the AE curve shifting down from AE1 to AE*. a) The Short-Run Aggregate Supply (AS) curve is upward sloping, so as Aggregate Demand (AD) is increased by the expansionary policy leading to an increase in equilibrium real GDP, the shift will also result in some product price…arrow_forwardKeynesian economics predicts that if government policy makers deem current equilibrium real Gross Domestic Product (GDP) to be "too low," then an appropriate policy action would be to do nothing, because the economy is self-adjusting. raise government spending, thereby increasing aggregate demand and pushing up real Gross Domestic Product (GDP) with little or no inflationary consequences. increase taxes, thereby causing aggregate demand to increase and inducing a rise in real Gross Domestic Product (GDP) with little or no inflationary consequences. reduce the money stock, thereby causing aggregate demand to decrease and inducing a rise in fall in the price level that generates an increase in total planned expenditures.arrow_forward
- In 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_forwardThe aggregate demand and the aggregate supply model allows us to examine how a variety of events can affect the economy. Explain the shape of aggregate demand curve. How do Classical and Keynesian economists differ in their view of the aggregate supply curve? In your own words, discuss which of the four sources identified with aggregate demand has caused a change in the aggregate demand for a product or service you or your employer use. Share the effect that source has had on how you or your employer contribute to the measurement of aggregate demand.arrow_forwardIf the economy had been operating at a full- employment equilibrium, a. Describe the macroeconomic equilibrium after the rise in consumer spending. b. Explain and draw a graph to illustrate how the economy can adjust in the long run to restore a full-employment equilibrium. The magazine Women of China reported that Chinese women in big cities spent 63% of their income on consumer goods last year, up from a meager 26% in 2007. Clothing accounted for the biggest chunk of that spending, at nearly 30%, followed by digital products such as cell phones and cameras (11%) and travel (10%). Chinese consumption as a whole grew faster than the overall economy in the first half of the year and is expected to reach 42% of GDP by 2020, up from the current 36%.arrow_forward
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