The predictions of the Keynesian economic theory.
Explanation of Solution
Using the aggregate
In Figure 1, the horizontal axis depicts the
Concept Introduction:
Real Gross Domestic Product (Real GDP): Real GDP refers to the market value of all the final goods and services produced in an economy during an accounting year, measured at constant prices.
Aggregate demand (AD): An aggregate demand refers to the total value of the goods and services that are demanded at a particular price within a given period of time.
Aggregate supply: An aggregate supply is the total value of supply of the final goods and services in an economy within a given period of time.
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Chapter 17 Solutions
Principles of Macroeconomics (12th Edition)
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- If the economy experiences inflation and economic growth, this means that aggregate demand grows by more than aggregate supply. True or Falsearrow_forwardExplain how the Federal Reserve’s raising of interest rates affects the following variables in the short run: household consumption, business investment, real GDP, and the price level. Insert or attach a well-labeled Aggregate Demand/Aggregate Supply graph that would illustrate the effect of an increase in interest rates on Aggregate Demand when the economy is close to potential real GDP. Explain your graph.arrow_forwardIn the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift Many workers leave to pursue more lucrative careers in foreign economies. A scientific breakthrough significantly increases food production per acre of farmland. A natural disaster destroys a significant amount of the economy's production facilities.arrow_forward
- Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. The inflation rate C The price level C The level of technological knowledge The size of the labor force Suppose the economy produces real GDP of $70 billion when unemployment is at its natural rate. Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph. 132 128 LRAS 124 120 116 112 108 104 100 10 20 30 40 50 60 70 80 OUTPUT (Billions of dollars) Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to which will: O Shift the long-run aggregate supply curve to the right O Shift the long-run aggregate supply curve to the left O Not affect the long-run aggregate supply curve PRICE LEVELarrow_forwardGraphically show the impact of a crude oil price decrease in the long-run . Include all three graphs: AS&AD, Money Market. Planned Expenditure. Start with initial steady state. Show impact of a crude oil price drop in the short-run. Next show the long-run impact if the Federal Reserve does not change policy. Show the lack of self-correcting mechanism (automatic stabilizer) Show the new steady state.arrow_forwardIf the federal government runs large deficits it could cause crowding out through interest rates. However, the Federal Reserve could try to keep interest rates down by increasing the growth of the monetary base. What will be the long-run result of these two policies? high inflation and high nominal interest rates low unemployment rate and low inflation high national debt and low interest rates low nominal interest rates and low unemployment ratearrow_forward
- In the short run, the increase in investment spending due to the new tax credit shifts the aggregate (supply, demand) curve to the (left right), causing the price level to (fall below, rise above) the price level people expected, and the quantity of output to (fall below, rise above) potential output. The investment tax credit will cause the unemployment rate to (fall below, rise above) the natural rate of unemployment in the short run.arrow_forwardIs the following statement TRUE or FALSE? Please provide reason for the answer. In the short run, the central bank's actions to fight inflation shift the aggregate demand curve leftward.arrow_forwardA stimulative monetary or fiscal action should increase aggregate demand. What factors may limit the actual increase in aggregate demand?arrow_forward