Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 26, Problem 2.6P
To determine
Explanation for negative slope of the simple
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The following graph plots aggregate demand (AD2027AD2027) and aggregate supply (AS) for the imaginary country of Cotopaxi in the year 2027.
Suppose the natural level of output in this economy is $6 trillion.
On the following graph, use the green line (triangle symbol) to plot the long-run aggregate supply (LRAS) curve for this economy.
Economists forecast that if the government takes no action and the economy continues to grow at the current rate, aggregate demand in 2028 will be given by the curve labeled ADAADA, resulting in the outcome given by point A. If, however, the government pursues an expansionary policy, aggregate demand in 2028 will be given by the curve labeled ADBADB, resulting in the outcome given by point B.
The following table presents projections for the unemployment rates that would occur at point A and point B. Consider the potential rate of inflation between 2027 and 2028, depending on whether the economy moves from the initial price level of 102 to the…
"The demand curves for all products have
negative slopes. For instance, the demand
curves for milk,automobiles, personal
computers, and shirts all have negative
slopes. Therefore, because the aggregate
demand curve shows the demand for all
products, it too must have a negative slope. "
Comment on this assertion.
The following graph shows a decrease in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the left from AD1AD1 to AD2AD2, causing the quantity of output demanded to fall at all price levels. For example, at a price level of 140, output is now $200 billion, where previously it was $300 billion.
The following table lists several determinants of aggregate demand.
Complete the table by indicating the change in each determinant necessary to decrease aggregate demand.
Change needed to decrease AD
Wealth
(increase/ decrease)
Taxes
(increase/ decrease)
Expected rate of return on investment
(increase/ decrease)
Incomes in other countries
(increase/ decrease)
Chapter 26 Solutions
Principles of Economics (12th Edition)
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- Considering the formula for Aggregate Demand (Also known as the product market) answer the following question:Name two macroeconomic variables (from this formula) that decline when the economy goes into recession, and explain why this happens?Name one macroeconomic variable (from this formula) that rises during a recession, and explain why this happens?arrow_forwardThe following graph shows the short-run and long-run aggregate supply curves (SRAS and LRAS) for an economy. Suppose there is a technological improvement that allows firms to reduce their costs of production permanently. Drag one or both of the curves on the graph to illustrate the long-term effects of this change. If you don't believe there will be any long-term effects, leave the curves where they are. 240 LRAS SRAS 200 SRAS 160 LRAS 120 80 40 6 12 18 24 REAL GDP (Trillions of dollars) Assuming aggregate demand is not affected by the technological improvement, the long-run effect of this v supply shock is v in aggregate output and v in the price level. PRICE LEVELarrow_forwardDeterminants of aggregate demand The following graph shows a decrease in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the left from AD1AD1 to AD2AD2, causing the quantity of output demanded to fall at all price levels. For example, at a price level of 140, output is now $200 billion, where previously it was $300 billion.arrow_forward
- The following graph shows an aggregate demand curve (AD) illustrating the inverse relationship between the price level and the quantity of Real GDP in the United States. During World War II, the United States increased military spending. Show the effect of the following scenario on the aggregate demand curve by dragging the curve or moving the point to the appropriate position. Note: Tool tip: To move the curve, click and drag any part of the curve. The curve will snap into position, so if you try to move it and it snaps back to its original position, just try again and drag it a little farther. PRICE LEVEL Aggregate Demand I I " I 1 REAL GDP AD AD (?)arrow_forwardI don't quite understand what is asking of the change that will occur in the long runarrow_forwardAre the determinants of aggregate demand the same things that apply to demand for an individual good?arrow_forward
- Determinants of aggregate demand The following graph shows an increase in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the right from AD1AD1 to AD2AD2, causing the quantity of output demanded to rise at all price levels. For example, at a price level of 140, output is now $400 billion, where previously it was $300 billion.arrow_forwardsuppose that at a price index of 154 the quantity demand of u.s. real GDP is 10.0 trillion worth of goods. do these data represent aggregate demand or point on an aggregate demand curve? explain your answer?arrow_forwardhow should I make the curvearrow_forward
- The following graph shows an increase in short-run aggregate supply (SRAS) in a hypothetical economy. Specifically, short-run aggregate supply shifts to the right from SRAS₁ to SRAS2, causing the quantity of output supplied at a price level of 125 to rise from $250 billion to $350 billion. Review the graph and then complete the table that follows. PRICE LEVEL 200 175 150 125 100 75 50 25 0 0 50 SRAS SRAS₂ 100 150 200 250 300 350 400 REAL GDP (Billions of dollars) ? The following table lists several determinants of short-run aggregate supply. Complete the table by indicating the change needed in each determinant to increase short-run aggregate supply. Determinant Change Needed to Increase SRAS Input Prices increase or decrease Burdensome Regulations increase or decrease Technology decline or improvementarrow_forwardUse the following graph to answer the following questions. Line Y Price level (P) 100 80 B Line Z Line X2 Line X1 Real GDP (3) If point A occurs chronologically before point B, then this graph could represent a decrease in aggregate demand with a decrease in long-run and short-run aggregate supply. a decrease in aggregate demand with constant long-run and short-run aggregate supply. constant aggregate demand with a decline in long-run aggregate supply. an increase in aggregate demand with constant long-run and short-run aggregate supply. constant aggregate demand with a decline in short-run aggregate supply.arrow_forwardChapter 20 Homework 1 Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 105. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 95, 100, 105, 110, and 115. PRICE LEVEL 125 120 115 110 105 100 95 90 85 80 75 0 10 20 30 40 50 60 70 OUTPUT (Billions of dollars) 80 90 100 AS LRAS The short-run quantity of output supplied by firms will fall short of the natural level of output when the actual price level level that people expected. the pricearrow_forward
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