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CHAPTER 5 PROBLEMS
1. Use aggregate supply and demand diagrams to explain what would happen to
GDP and inflation in the following circumstances:
a) Consumers decide to cut back their savings, and buy more household
appliances.
b) Tornadoes destroy many factories in the country, while a severe drought ruins
many crops.
c) Miraculous new technological developments raise productivity in
manufacturing.
d) Because of worries over the deficit, the government sharply curtails its
expenditures on social programs.
2. Is it more likely that aggregate supply or aggregate demand is shifting if:
a) Inflation and output move in the same direction.
b) Inflation and output move in opposite directions.
c) Inflation and unemployment move in the same direction.
3. Consider two economies, one with a relatively flat aggregate supply
curve and one with a relatively steep aggregate supply curve. In which
economy will the government have more success in raising GDP by
increasing its spending? What factors do you think determine the slope
of the aggregate supply curve?
4. How do the following events influence GDP?
a) Each of five mothers living in a neighborhood takes care of her pre-school
child in her own home.
b) The mothers share the childcare work, each one taking all five children one
day a week.
c) Four of the mothers pay the fifth to take care of their children five days a
week (taking care, of course, to pay the required Social Security taxes!).
d) Brent buys a new car from a dealer for $20,000.
e) Brent sells Saba a used car for $7,000.
f) Jim sells his old car to a dealer for $6,000. The dealer washes it, lists it in the
classified ads and on the dealer’s web page and then sells it to Kara for
$8,000.
g) A Japanese company builds a factory in Tennessee. (If this affects GDP, is it
the Japanese or the American GDP?)
h) A Japanese company buys stock in a Tennessee company.
i) An earthquake destroys many structures in the business district of Santa Cruz,
California. The structures are not rebuilt this year.
j) An earthquake destroys much of Santa Cruz, and within a short time the city
is rebuilt as it was before.