Download Macroeconomics, HW 1

Macroeconomics, HW 1
Craig Schroeder
January 11, 2005
Page 105, Chapter 5
Problem 15: (Aggregate Demand and Supply) Determine whether each of the following would cause a
shift in the aggregate demand curve, the aggregate supply curve, neigher, or both. Which curve shifts, and
in which direction? What happens to aggregate output and the price level in each case?
(a) The price level changes. The price level is assumed to be determined by the free market. Fluctuations in price will cause changes in neither aggregate supply nor aggregate demand. As such, the price
level will converge to its appropriate value. Aggregate output will fluctuate until the price level becomes
stable. Over time, heither the price level nor output are affected.
(b) Consumer confidence declines. Decreased consumer confidence will shift the aggregate demand
curve to the left, resulting in a reduction in demand. Consumer confidence does not affect the aggregate
supply curve. Decreasing aggregate demand without changing aggregate supply results in decreased aggregate
output and a lower price level.
(c) The supply of resources increases. An increase in the availability of resources does not affect
the quantity or goods that people demand. As such, the aggregate demand curve is unaffected. Resource
increases will lower the costs of suppliers. The result is a shift of the aggregate supply curve to the right.
Shifting the aggregate supply curve to the right without changing the aggregate demand curve results in an
increase in aggregate output and a drop in the price level.
(d) The wage rate increases. Wage increases will cause the aggregate demand curve to shift to the
right. More wages result in additional spendable cash, which can then be used to purchase more goods
that would otherwise not be demanded. Wage increases do not directly affect the aggregate supply curve.
Increasing aggregate demand without changing aggregate supply results in increased aggregate output and
a higher price level.
Problem 16: (Supply-side Economics) One supply-side measure advocated by the Reagan administration
was a cut in income tax rates. Use an aggregate demand-supply diagram to show what affect was intended.
What might happen if such a tax cut also generated a change in aggregate demand?
An aggregate demand-supply diagram is illustrated in Figure 1(a). The negatively-sloped aggregate
demand curve is unaffected, The intended result is a right shift in the supply curve and the resulting rise in
aggregate output and reduction in price level.
If the tax cut also creates a change in aggregate demand, then a right shift of aggregate demand will
result. This may produce an affect like that shown in Figure 1(b). Aggregate output will increase even
further, but price levels will not drop as much and may actually increase.
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P
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Quantity
Quantity
(a) Supply Only.
(b) Supply and Demand.
Figure 1: Result of Right Shifting Aggregate Supply or Demand.
Country Profile Comparison
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7
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Country
Year Covered
Population
Per Capita Income
Economic Growth Rate
Unemployment Rate
Inflation Rate
Total Merchandise Exports
and Imports
and Balance
Currency Used
Russia
2004
143,782,338
$8,900
7.3%
8.5%
13.7%
$134.4 billion
$74.8 billion
$35.91 billion
Russian ruble (RUR)
United States
2004
293,027,571
$37,800
3.1%
6%
2.3%
$714.5 billion
$1.26 trillion
$-541.8 billion
US dollar (USD)
Notes
Per Capita Income was realized as GDP - per capita. Economic Growth Rate was realized as GDP - real
growth rate.
Reference Cited
1. CIA - The World Factbook - Russia. http://www.cia.gov/cia/publications/factbook/geos/rs.html
2. CIA - The World Factbook - United States. http://www.cia.gov/cia/publications/factbook/geos/us.html
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