Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Fei–Ranis model of economic growth wikipedia , lookup
Full employment wikipedia , lookup
Phillips curve wikipedia , lookup
Chinese economic reform wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Non-monetary economy wikipedia , lookup
Business cycle wikipedia , lookup
Gross domestic product wikipedia , lookup
LIGHTHOUSE CPA SOCIAL SCIENCES DEPARTMENT AP ECONOMICS EXAM PREP WORKSHOP # 3 > AGGREGATE DEMAND AND SUPPLY NAME : DATE : ________________________________________________________________________________ 1. Figure out the following multiplier questions : A. What is the value of the tax increase multiplier if the MPC is .80 ? -4 B. Consumption changes by 400 and disposable income by 100 . What is the MPC ? ∆ C ÷ ∆ DI = 4 C. What is the value of the government spending multiplier if the MPC is .50 .20 D. If there is a country that has an MPC of .60 in which the government increased spending by $ 200 and increased taxes by $ 100 , what would be the change in GDP ? Government multiplier 2.5 X $ 200 = $ 500 Tax multiplier - 1.25 X $ 100 = $ - 125 $ 500 - $ 125 = $ 375 2. Why is the aggregate demand curve downward sloping ? A. According to the aggregate demand curve , what is the relationship between the price level and real GDP ? There is an inverse relationship : the lower the price level , the higher the real GDP or real national output B. Explain how each of the following effects helps explain why the AD curve is downward sloping . 1. Interest rate effect : A lower price level decreases the demand for money , which decreases the equilibrium interest rate and increases investment and interest sensitive components of consumption and , therefore , the real output . 2. Net export effect : A lower United States price level means prices for goods produced in the United States are lower relative to the prices in foreign countries . Thus , people will buy more United States produced goods and fewer foreign produced goods . This increases net exports , a component of GDP . 3. In what ways do the reasons that explain the downward slope of the AD curve differ from the reasons that explain the downward slope of the demand curve for a single product ? The demand curve for a single product is downward sloping because of diminishing marginal utility and income and substitution effects for the individual at a specific level of income . For macro aggregate demand , the reasons are the interest rate effect and the net export effect . 3. What shifts the aggregate demand curve ? Using the chart below , determine whether each situation will cause an increase ( I ) , decrease ( D ) , or no change ( NC ) in AD . Always start at curve “ B ” . For each situation that causes a change in AD , write the letter of the new demand curve in the “ New AD Curve ” column . A B C Change In AD New AD Curve A. Congress cuts taxes I C B. Business investment spending decreases D A C. Government spending to increase next fiscal year ; president promises not to increase taxes I C D. Survey shows consumer confidence jumps I C E. Stock market collapses ; investors lose billions D A 4. F. Productivity rises for fourth straight year NC G. President cuts defense spending by 20 % ; no increase in domestic spending D A Why can the aggregate supply curve have three different shapes ? PL PL SRAS PL SRAS SRAS REAL GDP REAL GDP REAL GDP A. Under what conditions would an economy have a horizontal SRAS curve ? When there are a lot of unemployed resources or a constant price level as in a depression B. Under what conditions would an economy have a vertical SRAS curve ? An AS curve is vertical when real GDP is at a level with unemployment at the full employment level and where any increase in demand will result only in an increase in prices . The economy is unable to produce any more goods and services for a sustainable period of time . C. Under what conditions would an economy have a positively sloped SRAS curve ? In this range , resources are getting closer to full employment levels , which creates upward pressure on prices . The upward pressure on prices is caused by rising costs of doing business . Wages and prices may be slow to adjust , we call this “ sticky ” , because firms and workers might lack information . D. Assume AD increased . What would be the effect on real GDP and the price level if the economy had a horizontal SRAS curve ? A positively sloped SRAS curve ? A vertical SRAS curve ? With a horizontal SRAS curve , an increase in AD results in an increase in real GDP and no change in the price level . With a positively sloped SRAS curve , an increase in AD results in increases in real GDP and the price level . With a vertical SRAS curve , an increase in AD results in no change in real GDP and an increase in the price level . E. What range of the SRAS curve do you think the economy is in today ? Explain your answer . 5. What shifts the SRAS curve ? Using the chart below , determine whether each situation will cause an increase ( I ) , decrease ( D ) , or no change ( NC ) in AD . Always start at curve “ B ” . For each situation that causes a change in SRAS , write the letter of the new demand curve in the “ New SRAS Curve ” column . A B C Change In SRAS New SRAS Curve A. Unions grow more aggressive ; wage rates increase D A B. OPEC successfully increases oil prices D A C. Labor productivity increases dramatically I C D. Giant natural gas discovery decreases energy prices I C E. Computer technology brings new efficiency to industries I C F. Government spending increases NC Change In SRAS G. Cuts in tax rates increase incentives to save NC H. Low birth rate will decrease the labor force in the future NC I. Research shows that improved schools have increased the skills of American workers and managers I New SRAS Curve C ** NOTE : F and G do not affect the aggregate supply curve . They do shift the AD curve . Also , H will not affect AS for 16 years or more . 6. Equilibrium price and output levels based on the chart below : PL SRAS P2 P P1 AD Y Y1 Y2 REAL GDP A. What are the equilibrium price level and output ? P and Y B. What would eventually happen to the price level and output if the initial price level were P2 rather than P ? Why would this happen ? There is excess supply of goods and services . Inventories are building up. To reduce the inventory levels , firms will cut prices and output . The price level will fall , and real output will decrease . This would happen because higher inventories will cause sellers to reduce prices ; lower prices will provide fewer incentives to increase production . However , consumers will purchase more output at lower prices . C. What would eventually happen to the price level and output if the initial price level were P1 rather than P ? Why would this happen ? There is excess demand . Inventories are below intended levels . Firms will seek to increase inventory levels , prices will rise and output will increase . This would happen because competition among buyers will increase the price level ; increased prices will encourage producers to increase their output and consumers will buy less . 7. For each situation below , illustrate the change on the aggregate supply and demand graph and describe the effect on the equilibrium price level and real GDP by writing in an ( I ) for an increase , ( D ) for a decrease , or ( NC ) for unchanged . A. Congress passes a tax cut for the middle class , and the president signs it . PL SRAS Price Level : I Real GDP : I P1 P AD 1 AD Y REAL GDP Y1 B. During a recession , the government increases spending on schools , highways , and other public works . PL SRAS P1 P Price Level : I Real GDP : I AD 1 AD Y REAL GDP Y1 C. New natural gas discoveries cause large decrease in energy prices . PL SRAS P Price Level : D Real GDP : I SRAS 1 P1 AD REAL GDP Y Y1 D. Illustrate the effects of an increase in aggregate demand . SRAS PL P1 Price Level : I Real GDP : I AD 1 P AD REAL GDP Y Y1 E. Illustrate the effects of increases in production costs . PL SRAS 1 SRAS Price Level : I Real GDP : D P1 P AD REAL GDP Y1 Y F. New technology and better education increase productivity . PL SRAS SRAS 1 P P1 Price Level : D Real GDP : I AD REAL GDP Y Y1 G. With the unemployment rate at 5 % , the federal government reduces personal taxes and increases spending . LRAS PL P1 SRAS P Price Level : I Real GDP : I AD 1 AD Y Y1 REAL GDP 8. Illustrate the indicated change on both the modern AD and AS model , and the Keynesian model . A. The economy is at less than full employment . Then an increase in consumer confidence moves the economy to full employment . LRAS SRAS PL AE 1 AE AE AD 1 AD Y 9. REAL GDP REAL GDP FE An “ exogenous shock ” is a change in a variable outside the primary economic model that affects aggregate demand or supply . For each of the situations below , draw a new curve that will represent the impact of the exogenous demand shock highlighted and briefly explain the reason for the change in the graph . A. As part of its countercyclical policy , the government both reduces taxes and increases transfer payments . SRAS PL P1 With increased discretionary incomes , taxpayers will increase consumption . AD will increase . AD 1 P AD Y REAL GDP Y1 B. While the United States was in the midst of the Great Depression , a foreign power attacked . Congress declared war and more than one million soldiers were drafted in the first year , while defense spending was increased several times over . SRAS PL P1 AD 1 P AD Consumers who had been unemployed are hired to fill production demand and will spend their income . The government has also increased spending and its demand for goods and services . AD will increase . REAL GDP Y Y1 C. Good weather results in the highest corn and wheat yields in 40 years . PL SRAS SRAS 1 P AD P1 Y The weather produces an increase in the supply of corn and wheat , and if demand remains constant , the price will decrease . This in turn will decrease the price of goods for many food related industries . The SRAS curve will shift to the right . REAL GDP Y1 D. An enemy power sets up a blockade of the sea lanes leading to a country , and most ships refuse to deliver cargo through the blockade . SRAS 1 PL SRAS P1 A significant decrease in available goods will increase the cost of production for businesses . The SRAS curve will shift to the left . P AD REAL GDP Y1 Y E. To balance the budget , the federal government cuts Social Security payments by 10 % and federal aid to education by 20 % . SRAS F. PL P AD P1 AD 1 Y1 Y Recipients of Social Security will have less income to spend . Local school districts will cut back by laying off teachers or will raise taxes . Either action will reduce discretionary income , and , thus consumption decreases . AD will decrease . REAL GDP F. During a long , slow recovery from a recession , consumers postponed major purchases . Suddenly they begin to buy cars , refrigerators , and televisions to replace their failing models . SRAS PL P1 AD will increase as a result of increased autonomous spending . AD 1 P AD Y REAL GDP Y1 G. With no other dramatic changes , the government raises taxes and reduces transfer payments in the hope of balancing the federal budget . SRAS PL P Higher taxes and a reduction in transfer payments reduce disposable income , which reduces consumption spending . AD will decrease . AD P1 AD 1 REAL GDP Y1 Y H. Brazil solves its foreign debt and inflation problems . It then orders ten billion worth of capital equipment from the United States . Illustrate and explain how this affects the United States economy . SRAS PL P1 P AD will increase as a result of increased demand for exports . AD 1 AD REAL GDP 10. Y Y1 In the following graph , suppose the aggregate demand shifts from AD to AD1 . Guided by items A through E below , show how will the economy react over time ? Assume that no monetary or fiscal policy is undertaken . PL LRAS SRAS 1 SRAS P1 AD 1 P AD Y Y1 REAL GDP A. What will happen to output in the short run ? Output initially increases to Y1 in response to the increase in aggregate demand . B. What will happen to output as the economy moves to the long run equilibrium ? Explain . Over time , labor realizes that the real wage has decrease and demands a higher nominal wage . The increase in the nominal wage causes the short run aggregate supply curve to decrease , and output returns to Y . C. What will happen to the price level ? The price level increases initially because firms are paying overtime and are using less productive resources to produce beyond full employment output . The price level will continue to rise to cover increased costs . D. What will happen to wages ? With the increase in AD , the price level rises and the real wage decreases . Once labor realizes that the real wage has decreased , it demands higher nominal wages , forcing the real wage to return to the original level . In response to the increase in nominal wages , firms increase price and the SRAS shifts to the left . E. In the graph , draw the shifts in AD and SRAS that you think will occur . Indicate the final aggregate demand and short run aggregate supply curves by labeling them as AD1 and SRAS1 The economy will return to full employment . 11. Draw a new SRAS or AD curve that represents the change based on the situation described below . Also , explain the reasons for the change in the graph , and then explain what happens in the long run if no stabilization policy is implemented . The government increases spending on education , health care , housing and basic services for low income people . No increase in taxes accompanies the program . LRAS SRAS 1 Higher government spending PL increases the AD in the short run. SRAS AD 1 AD Over the long run , nominal wages increase to maintain real wages , and the SRAS decreases . The final result is on the LRAS at SRAS1 and AD1 . REAL GDP 12. Test your understanding of fiscal policy by completing the table below . Your choices for each situation must be consistent , that is , you should choose either an expansionary or contractionary fiscal policy . Be aware that fiscal policy can not provide a solution to one of the situations . Fill in the spaces as follows : For columns A , B , and C indicate whether you want to increase the item using an I , or decrease it using a D . For column D use the I or D to indicate whether the national debt would be increased or decreased . Situation (A)– Objective for aggregate demand (B)– Action on taxes (C)– Action on government spending (D)– Effect on the national debt NA NA NA NA National unemployment rate rises to 12 % Surveys show that consumers are losing confidence in the economy , retail sales are weak , and business inventories are increasing rapidly Business sales and investment are expanding rapidly and economists think strong inflation lies ahead Inflation persists while unemployment stays high 13. Label the following scenarios with the type of fiscal policy they are related to . Use an ( E ) for expansionary and a ( C ) for contractionary . A. B. C. D. 14. The government cuts personal income taxes The government increases the capital gains tax The government launches a major new space program The government gives all its employees a pay raise E C E E Assume a persistent gap between current income , Y1 , and full employment income , Y , as shown in the figure below . LRAS PL SRAS SRAS2 p2 SRAS1 p AD2 p1 AD1 AD Y1 Y A. If the government decided not to implement any fiscal policy , the unemployment of resources would eventually lead to a decrease in factor prices . Show on the graph that this could eliminate the gap . See in red . B. A second possibility would be to depend on a smaller shift of aggregate supply and have a modest shift in aggregate demand by a discretionary fiscal stimulus so that the price level was maintained at “ p ” . Show these two changes . See in blue . C. A third possibility is that government would seek changes in taxes and / or expenditures that would rapidly bring the economy to full employment . Show this on the graph . See in green . 15. True , false , or uncertain , and explain why ? “ In the long run , when nominal wages increase , everyone has more money to spend ; therefore , the economy as a whole benefits . ” False . If prices rise and the real wage is maintained , then there will be no change in the standard of living 16. True , false , or uncertain , and explain why ? “ Our economy is able to adjust to a long run equilibrium after a decrease in aggregate demand because prices and wages are sticky . ” False . Sticky wages and prices make it more difficult to respond . 17. True , false , or uncertain and explain why ? “ If we are in a recession , as long as we continue to increase aggregate demand , we can achieve full employment without driving up the inflation rate . ” False . As aggregate demand increases and the economy starts to approach full employment , there will be a tendency for the price level to rise . 18. True , false , or uncertain and explain why ? “ When the economy experiences an increase in aggregate demand , it will discover that its production possibilities curve has shifted outward . ” False . The nation’s PPC shifts outward when it finds more resources or develops new technology . These are the same elements that will cause the LRAS to shift outward . 19. Use short run AD and AS analysis to illustrate the results of the following events . Also provide a very brief explanation of the changes . A. There is a 25 % decrease in the price of crude oil SRAS PL Lower energy costs allows more to be produced SRAS1 AD REAL GDP B. Price levels in Germany , Japan , and Great Britain rise considerably , while price levels in the United States remain unchanged . PL SRAS AD1 AD More goods will be exported because they are less expensive when compared to foreign goods REAL GDP 20. For each situation below , make additions to the graphs to illustrate the change . Then indicate the response in terms of shifts in or movements along the aggregate demand or aggregate supply curve and the short run effect on real GDP and the price level . Indicate shifts in the curve by an “ S ” and movements along the curve by an “ A ” . Indicate the changes in price level , unemployment , and real GDP by writing in an ( I ) for an increase , ( D ) for a decrease , or ( NC ) for unchanged . A. Increase in labor productivity due to technological change . PL SRAS SRAS 1 AD REAL GDP AD Curve : AS Curve : Real GDP : Price Level : Unemployment : A S I D NC / D B. Increase in the cost of goods used by many firms . PL SRAS 1 AD Curve : AS Curve : Real GDP : Price Level : Unemployment : SRAS A S D I I AD REAL GDP C. A major reduction in investment and consumer spending . SRAS PL AD Curve : AS Curve : Real GDP : Price Level : Unemployment : AD S A D D I AD 1 REAL GDP 21. Illustrate the indicated change on both the modern AD and AS model , and the Keynesian model . The economy is at full employment but businesses begin to believe that a recession is head . LRAS PL SRAS AE AE AE 1 AD AD 1 REAL GDP REAL GDP FE 22. For each of the situations below , draw a new curve that will represent the impact of the exogenous demand shock highlighted and briefly explain the reason for the change in the graph . A. Economic booms in both Japan and Europe result in massive increases in orders for exported goods from the United States . SRAS PL AD 1 Increased orders for exports will cause more people to be hired and their increased income will result in increased consumer spending . AD will increase . AD REAL GDP B. New environmental standards raise the average cost of autos and truck 5 % . SRAS 1 SRAS PL The new standards result in increases in the costs of producing automobiles and trucks. This decreases AS . AD REAL GDP C. To avoid having to pay tariffs , firms begin to build new factories in the United States . In doing so , they invest in advanced United States technology that will help them produce goods in the United States at prices that are competitive . SRAS PL SRAS 1 AD 1 AD REAL GDP The increase in foreign investment to produce goods reduces unemployment , increases disposable income , and increases AD . Increased investment in technology will result in increased productivity and this increases AS . 23. Draw a new SRAS or AD curve that represents the change based on the situation described below . Also , explain the reasons for the change in the graph , and then explain what happens in the long run if no stabilization policy is implemented . OPEC cuts oil production by 30 % , and the world price for oil rises by 40 % . LRAS 1 LRAS SRAS 1 PL SRAS AD 1 Higher production costs decrease SRAS to SRAS1 . If the increase is permanent , with no othe alternative fuel found , the LRAS will shift left ( decrease ) to LRAS1 . AD REAL GDP 24. Answer the following questions regarding the aggregate supply and production possibilities curves ( PPC ) . A. What information does a PPC provide for us about a nation’s economy ? The maximum possible combinations of two types of goods an economy can produce when the economy is employing all its resources in a given time period and with a given technology . B. What would cause a nation’s PPC to shift ? Changes in the amount of resources or changes in technology . C. What do you know about a nation’s economy that is operating on the LRAS curve ? The economy is fully employing its resources in the most efficient way given the current state of technology . It can’t produce more of one good without producing less of another . D. If the price level rises , will LRAS curve shift ? Will the LRAS curve shift if AD changes ? NO NO Base your answers to E through J on the charts below LRAS PL SRAS Y1 Y Y2 C A P I T A L G O O D S B A C CONSUMER GOODS REAL GDP E. If an economy finds that it faces a short run equilibrium where real GDP is Y1 , how would you describe the condition of the economy ? Given this equilibrium level of output , at what point would the economy line on the PPC ? Explain your answer . Resources are employed . The economy is inside the PPC at a point like C . The economy can produce more consumer goods and more capital goods if all resources are fully employed . F. If an economy finds that it faces a short run equilibrium where real GDP is Y , how would you describe the condition of the economy ? Given this equilibrium level of output , at what point would the economy line on the PPC ? Explain your answer . The economy would be operating on the PPC at point B . All resources are fully employed . G. If an economy finds that it faces a short run equilibrium where real GDP is Y2 , how would you describe the condition of the economy ? Given this equilibrium level of output , at what point would the economy line on the PPC ? Explain your answer . The economy is overheated and at point A outside the PPC . The economy is working beyond the full employment level of production and will not be able to sustain this level unless the LRAS increases , or shifts to the right . H. If the economy were producing at Y2 , what would happen in the long run ? Why ? The price level and nominal wages will increase = inflation . I. What would cause a nation’s LRAS curve to shift ? Loss of resources will shift it to the left . Development of new resources will shift it to the right . J. How would a rightward shift in LRAS be shown on a PPC ? The PPC would shift outward , to the right . 25. Assume that a hypothetical economy is currently at an equilibrium national income level of $ 1 trillion , but the full employment national income is $ 1.2 trillion . Assume the government’s budget is currently in balance at $ 200 billion and the marginal propensity to consume is 0.75 . Use this data to answer the questions below . A. What is the gap between the equilibrium income and full employment ? $ 200 BILLION 4 B. The value of the multiplier is : C. Aggregate expenditures would have to be ( increased or decreased ? ) , and by how much , to eliminate the gap ? Increased by $ 50 billion D. The government could attempt to eliminate the gap by holding taxes constant and ( increasing or decreasing ? ) , expenditures by how much ? Increase by $ 50 billion E. Alternatively , the government could attempt to eliminate the gap by holding expenditures constant and ( increasing or decreasing ? ) its tax receipts by how much ? Decreasing by $ 66.7 billion 26. True , false , or uncertain , and explain why ? “ Regardless of our current economic situation , an increase in aggregate demand will always create new jobs . ” False , at a level higher than full employment output , workers will push for higher wages , which will shift the SRAS curve left ; output and employment will decrease , and the price level will rise . Thus , as aggregate demand increases , an increase in output cannot be sustained and only prices rise .