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 27, Problem 1.2P
Sub part (a):
To determine
Identify the role of tax cut on the price level and equilibrium GDP.
Sub part (b):
To determine
Identify the role of increasing consumer confidence and business optimism on the price level and equilibrium GDP in an economy.
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By using aggregate supply and demand curves to illustrate your points, discuss the impacts of the following events on the price level and on equilibrium GDP (Y) in the short run:
a. A tax cut holding government purchases constant with the economy operating at near full capacity
b. An increase in the money supply during a period of high unemployment and excess industrial capacity
c. An increase in the price of oil caused by a war in the Middle East, assuming that the Central Bank attempts to keep interest rates constant by accommodating inflation
d. An increase in taxes and a cut in government spending supported by a cooperative Fed acting to keep output from falling
The graphs illustrate an initial equilibrium for the economy. Suppose that the government increases taxes.
Use the graphs to show the new positions of aggregate demand (AD), short-run aggregate supply (SRAS), and long-run
aggregate supply (LRAS) in both the short run and the long run, as well as the short-run and long-run equilibriums resulting
from this change. Then, indicate what happens to the price level and GDP in the short run and in the long run.
Aggregate price level
Short-run graph
LRAS
SRAS
Short-run equilibrium
Real GDP
AD
Aggregate price level
Long-run graph
LRAS
Long-run equilibrium
Real GDP
AD
SRAS
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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.
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Principles of Economics (12th Edition)
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- Determinants 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_forwardConsidering 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 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_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_forwardThe graphs illustrate an initial equilibrium for the economy. Suppose that the government increases spending. Use the graphs to show the new positions of aggregate demand (AD), short‑run aggregate supply (SRAS), and long‑run aggregate supply (LRAS) in both the short run and the long run, as well as the short‑run and long‑run equilibriums resulting from this change. Then, indicate what happens to the price level and real GDP (or aggregate output) in the short run and in the long run. Adjust the graph. explain the second image as well and which is right.arrow_forwardSuppose the money market for some hypothetical economy is given by the following graph, which plots the money demand and money supply curves. Assume the central bank in this economy (the Fed) fixes the quantity of money supplied. Suppose the price level decreases from 150 to 125. Shift the appropriate curve on the graph to show the impact of a decrease in the overall price level on the market for money. Money Supply 15 12 4 Money Demand 3 5 10 15 20 MONEY (Billions of dollars) INTEREST RATE (Percent) 18 0 0 25 30 Money Demand Money Supply (?) Following the price level decrease, the quantity of money demanded at the initial interest rate of 9% will be supplied by the Fed at this interest rate. As a result, individuals will attempt to bonds and other interest-bearing assets, and bond issuers will realize that they restored in the money market at an interest rate of than the quantity of money their money holdings. In order to do so, they will interest rates until equilibrium isarrow_forward
- Draw an aggregate demand and supply diagram for Japan. In the diagram, show how each of the following affects aggregate demand and supply: The U.S. gross domestic product falls. The level of prices in Korea falls. Labor receives a large wage increase. Economists predict higher prices next year.arrow_forwardUsing a macroeconomics demand/supply analysis, where do you think current output is relative to what the economy is capable of producing? Look at recent trends in the data. What are the recent trends in the components of aggregate demand (consumption spending, investment spending, government purchases, and exports and imports?arrow_forwardUse the Aggregate supply and Aggregate Demand Model below to answer the questions that follow.Aggregate Supply and Aggregate Demand Model 1. Examine the influence of government expenditure on investment in a nation. Use Jot Inc. Ltd a multinational construction company in which you are the Chief Exec of the firm that that is highly diversified and recieves funds to construct highways and other government funded projects. Also, explain the factors that cause the Aggregate Demand curve to be downward sloping left to rightarrow_forward
- The following graph shows several aggregate demand and aggregate supply curves for an economy whose potential output is $5 trillion. The curves are labelled a, b, c, and d. Three points on the graph are also indicated by grey stars and labelled K, L, and M. 100 90 80 M. 70 60 50 b 40 30 a 20 2 3 4 5 6 7 REAL GDP (Trillions of dollars) Identify which curve on the previous graph corresponds to each description in the following table. If the curve described does not appear on the graph choose Not Shown. Description b Not Shown a Long-run aggregate supply (LRAS) Short-run aggregate supply (SRAS) when the economy is at long-run equilibrium Short-run aggregate supply (SRAS) when there is an inflationary gap Short-run aggregate supply (SRAS) when there is a recessionary gap Aggregate demand (AD) PRICE LE VELarrow_forward#2a: As you have learned consumer expectationsLinks to an external site. are a major driver of the short run path of the economy. Consumer spending accounts for about 68% of GDP and consumer sentimentLinks to an external site. is a major factor in shifting Aggregate Demand. Do you expect consumer confidence and business expectations to improve in the months ahead? Utilizing the equation GDP= C+I+G+ (X-M) from Chapter 6 what is your forecast for the way the AD curve will shift between now and the end of 2023? Explain. Do you anticipate a recession between now and the end of 2023?arrow_forwardQuestion: The attached picture shows the aggregate demand/aggregate supply situation in the U.S. What is the value of actual GDP? What is the value of the GDP deflator? Assume that people and businesses become pessimistic about the future of the economy; how will this affect the graph above in the short run? (i.e., which curve(s) will shift, and in which direction?) After the short-run event in part b, what will happen to actual GDP? What will happen to the price level? After the short-run event in part b, describe how the economy is doing in terms of the business cycle (i.e., recession, full employment, expansion). What long-run adjustments will be made in this economy as a result of the short-run changes in part c? How will the curve(s) shift in response to these long-run adjustments? After the long-run adjustments in part e, describe how the economy is doing in terms of the business cycle (i.e., recession, full employment, expansion).arrow_forward
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