Chapter 19, Problem 1CYU

a)

To determine

The short-run effects on the aggregate price level and aggregate output when the government increases minimum wage.

Explanation of Solution

With the increase in minimum or nominal wages, the short-run aggregate supply curve would shift to the left because there is a negative supply shock. Therefore, in this case, the aggregate price level will increase and aggregate output will decrease.

Economics Concept Introduction

Introduction: Any unexpected or uncertain event that causes the demand for goods and services in the market is called demand shock. This, in turn, also affects the price of those goods and services. And any unexpected or uncertain event that causes the supply of goods and services in the market is called supply shock. This, in turn, also affects the price of those goods and services.

b)

To determine

The short-run effects on the aggregate price level and on aggregate output when solar energy firms launch a program of investment spending.

Explanation of Solution

The aggregate demand curve in the short run would shift to the right due to an increase in investment spending. It is a positive demand sock and therefore, there would be an increase in both the aggregate price level as well as the aggregate output.

Economics Concept Introduction

Introduction: Any unexpected or uncertain event that causes the demand for goods and services in the market which, in turn, also affect the price of those goods and service is called demand shock. And any unexpected or uncertain event that causes the supply of goods and services in the market which, in turn, also affect the price of those goods and service is called supply shock.

c)

To determine

The short-run effects on the aggregate price level and on aggregate output when congress raises tax and cut spending.

Explanation of Solution

There would be a negative demand shock when taxes are increased and government spending is reduced, which means the aggregate demand curve would shift to the left. In this case, both the aggregate price level and aggregate output would decrease.

Economics Concept Introduction

Introduction: Any unexpected or uncertain event that causes the demand for goods and services in the market which, in turn, also affect the price of those goods and service is called demand shock. And any unexpected or uncertain event that causes the supply of goods and services in the market which, in turn, also affect the price of those goods and service is called supply shock.

d)

To determine

The short-run effects on the aggregate price level and aggregate output when severe weather destroys crops across the world.

Explanation of Solution

There would be a negative supply shock due to the destruction of crops and the short-run aggregate supply curve would shift to the left. And, therefore, in this case, the aggregate price level would increase and the aggregate output would decrease.

Economics Concept Introduction

Introduction: Any unexpected or uncertain event that causes the demand for goods and services in the market which, in turn, also affect the price of those goods and service is called demand shock. And any unexpected or uncertain event that causes the supply of goods and services in the market which, in turn, also affect the price of those goods and service is called supply shock.