Download PROBLEMS

PROBLEMS
1.
LO: 3
Illustrate these events with AS or AD shifts:
a.
Government increases defense spending.
b.
The Headline story on p. 246.
c.
Imported raw materials get cheaper.
d.
Congress cuts corporate income tax.
AACSB: Analytic
BT: Application
ASA
ASB
Price Level
ADA
ADB
Real Output
a.
b.
c.
d.
2.
LO: 4
An increase in government spending would shift AD from ADA to ADB.
The Headline story on p. 263 would result in a shift from ADB to ADA.
A decline in wealth results in shifting AD from ADB to ADA.
Imported raw materials are a factor of production and thus affect AS. A
decrease in the price of imported raw materials will result in shifting AS
from ASA to ASB.
A cut in corporate income taxes is a supply side cut and would result in
shifting AS from ASA to ASB.
Based on the Headline on p. 247:
a.
Illustrate the AS shift that occurs.
b.
Identify the old (Eo) and the new (E1) macro equilibrium.
c.
What macro ailments result?
d.
How can the economy stay healthy in this case?
AACSB: Analytic
a. and b.
BT: Application
Price
Level
AS2
AS
AD
E1
c.
d.
E0
Real
Output
The macro ailment that results is recession.
Government intervention to promote investment will help the economy
stay healthy.
3.
Graph the following aggregate supply and demand curves (be sure to draw to
scale).
a.
What explains the shape of the AS curve?
b.
What is the equilibrium price level?
c.
What is the equilibrium output?
d.
If the quantity of output demanded at every price level increases by $1
trillion, what happens to equilibrium output and prices? Graph your
answer.
LO: 3
AACSB: Analytic
a.
b.
c.
d.
BT: Application
An upward sloping AS curve indicates that as the average price level
increases output supplied in the economy increases.
The equilibrium price level is slightly above P= 110 where aggregate
quantity supplied equals aggregate quantity demanded.
The equilibrium output level is between 10 and 11 where AS=AD at a
common price.
If the quantity of output demanded at every price level increase by $1
trillion, the equilibrium output and prices will increase.
Aggregate Supply and Demand
250
Real Prices
200
150
AS
AD2
AD1
100
50
0
0
5
10
15
20
Real Output
4.
Draw a conventional aggregate demand curve on a graph. Then add three
different aggregate supply curves, labeled
S1: Horizontal curve
S2: Upward-sloping curve
S3: Vertical curve
all intersecting the AD curve at the same point.
If AD were to increase (shift to the right), which AS curve would lead to
(a)
The biggest increase in output?
(b.)
The largest jump in prices?
(c)
The least inflation?
LO: 1,3
AACSB: Analytic
BT: Application
ASv
ASu
Real
Prices
ASh
AD2
AD1
Real GDP
ASh
5.
(a)
The biggest increase in output occurs on the horizontal AS curve,
(b)
The largest jump in prices occurs on the vertical AS curve, ASv
(c)
The least inflation would occur on the horizontal AS curve, ASh
The following schedule provides information with which to draw both an
aggregate demand curve and an aggregate supply curve. Both curves are
assumed to be straight lines.
Average Price
Quantity Demanded Quantity Supplied
(dollars per unit) (units per year)
(units per year)
$1,000
0
1,000
100
900
100
a.
b.
c.
d.
e.
LO: 4
At what price level does equilibrium occur?
What curve would have shifted if a new equilibrium were to occur at an
output level of 700 and a price level of $700?
What curve would have shifted if a new equilibrium were to occur at an
output level of 700 and a price level of $500?
What curve would have shifted if a new equilibrium were to occur at an
output level of 700 and a price level of $300?
Compared to the initial equilibrium (a), how have the outcomes in (b), (c),
and (d) changed price levels or output?
AACSB: Analytic
BT: Application
$1,200
AS
$1,000
Price
Level
$800
$600
$400
$200
AD
$0
0
(a)
$500
200
400
600
Real
Output
800
1000
1200
6.
LO: 4
(b)
AD shifts to the right, raising both prices and output
(c)
Both AD and AS must shift to the right for this to occur. Prices stay the
same and output increases.
(d)
AS shifts to the right, raising output and lowering prices
(e)
The answers to part (e) are contained in answers (b) - (d) above.
Graph the situation described in the Headline on p. 244.
AACSB: Analytic
BT: Application
Output of
Capital
Goods
A
Output of
Consumption
Goods
The Headline describes a macro equilibrium that has left the economy inside its
production possibilities curve, as shown here at point A.