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ANSWERS TO CHECKPOINT EXERCISES
 CHECKPOINT 8.1 The AS-AD Model
1a. The aggregate demand curve is plotted in
Figure 8.1.
1b. The aggregate supply curve is plotted in
Figure 8.1.
1c. Figure 8.1 shows that the equilibrium price
level is 115 because that is the price level at
which the quantity of real GDP demanded
equals the quantity of real GDP supplied. The
equilibrium real GDP is $410 billion.
1d. As illustrated, actual real GDP ($410 billion)
exceeds potential GDP ($380 billion), so the
economy is an above full-employment
equilibrium.
2a. The strong expansion in the United States
will lead to an increase in aggregate demand
in Canada because as income grows in the
United States, Americans will buy more
Canadian exports. The increase in Canadian
exports increases Canada’s aggregate demand and has no effect on
Canada’s aggregate supply. When the Canadian government cuts taxes,
Canada’s aggregate demand increases and there is no change in Canada’s
aggregate supply.
2b. Both of the effects increase Canadian aggregate demand and shift the
Canadian aggregate demand curve rightward. As a result, real GDP and
the price level will both increase.
 CHECKPOINT 8.2 Potential GDP
1a. The production function is illustrated in
Figure 8.2.
The demand for labor curve and supply of
labor curve are in Figure 8.3.
1b. The equilibrium is illustrated in Figure 8.3.
The equilibrium quantity of labor is 3 billion
hours and the equilibrium real wage rate is $3
an hour. Potential GDP is the real GDP
produced by the equilibrium quantity of
labor. The production function shows that 3
billion hours of labor produces potential GDP
of $12 billion.
1c. Workers are paid $3 per hour and work for 3
billion hours. So, the total income paid to
labor is $9 billion. Real GDP is $12 billion, so
workers earn ($9 billion  $12 billion)  100,
which is 75 percent of GDP.
 CHECKPOINT 8.3 The Natural Unemployment Rate
1a. Sweden’s unemployment is likely to arise primarily from job rationing
because the factors mentioned, high unemployment benefits, high
minimum wage, and strong labor unions, are those that lead to job
rationing.
1b. All of the factors mentioned point toward Sweden having a higher natural
unemployment rate than the United States.
1c. None of the factors mentioned point toward Sweden having a lower natural
unemployment rate than the United States.
ANSWERS TO CHAPTER CHECKPOINT EXERCISES
1a.
1b.
1c.
1d.
Changes aggregate demand.
Changes aggregate demand.
Changes aggregate demand
Does not change aggregate demand, aggregate supply, or potential GDP.
(It changes the quantity of GDP demanded and the quantity of GDP
supplied and leads to a movement along the aggregate demand curve and
along the aggregate supply curve.)
1e. Changes aggregate demand.
1f. Does not change aggregate demand, aggregate supply, or potential GDP.
(It changes the quantity of GDP demanded and the quantity of GDP
supplied and leads to a movement along the aggregate demand curve and
along the aggregate supply curve.)
1g. Does not change aggregate demand, aggregate supply, or potential GDP.
1h. Changes aggregate supply.
1i. Changes aggregate supply and potential GDP.
1j. Changes aggregate supply and potential GDP.
2.
The event in part (h) decreases aggregate supply; the events in parts (i) and
(j) increase aggregate supply.
3.
The events in parts (a), (b)and (e) decrease aggregate demand; the event in
part (c) increases aggregate demand.
4.
The events in parts (i) and (j) increase potential GDP; none of the events
decrease potential GDP. (The event in part (h) decreases aggregate supply
but has no effect on full employment and so has no effect on potential
GDP.)
5.
The events in parts (i) and (j) increase real GDP and lower the price level;
the event in part (c) increases real GDP and raises the price level.
6.
The events in parts (a), (b), and (e) decrease real GDP and lower the price
level; the event in part (h) decreases real GDP and raises the price level.
7a.
7b.
7c.
7d.
The quantity of labor employed is 3 million hours a year.
With 3 million hours employed a year, potential GDP is $27 million.
The real wage rate is $8 an hour.
Total labor income equals the number of hours employed multiplied by
the real wage rate. So total labor income equals 3 million hours  $8 an
hour, which is $24 million.
8.
If the population increases, the supply of labor increases. So employment
increases, potential GDP increases, and the real wage rate falls.
9.
If labor productivity increases, the production function shifts upward and
the demand for labor increases. Employment and potential GDP increase
and the real wage rate rises.
Quantity of labor Real GDP
(hours)
(dollars)
0
0
10
10
20
19
30
27
40
34
50
40
60
45
70
49
80
52
90
54
100
55
10. The table showing the production function
is above. Figure 8.4 illustrates Nautica’s
production function.
Real wage rate Quantity of labor Quantity of
(dollars per
demanded
labor supplied
hour)
(hours)
(hours)
1.00
10
100
0.90
20
90
0.80
30
80
0.70
40
70
0.60
50
60
0.50
60
50
0.40
70
40
0.30
80
30
0.20
90
20
0.10
100
10
11a. The table showing Nautica’s demand for
labor schedule is above. Figure 8.5 illustrates
the demand for labor curve, LD.
11b. The table showing Nautica’s supply of labor
schedule is above. Figure 8.5 illustrates the supply of labor curve, LS.
11c. The equilibrium wage is $0.55 an hour and the equilibrium quantity of
labor is 55 hours.
11d. From the production function, potential GDP is (approximately) $43.
Potential GDP exceeds $42.50, the response that might seem correct at first
glance, because of diminishing returns.
12a. Cocoa Island has the greater level of potential GDP.
12b. Plantation Island has the higher real wage rate. We know that Plantation
Island has the higher real wage rate because the supply of labor is less on
Plantation Island because workers spend more time searching for jobs. As
the supply of labor decreases, the real wage rate rises.
12c. The increased search on Plantation Island means that Plantation Island has
the higher natural unemployment rate.
13a. With the new minimum wage, the amount of unemployment is the same
on the two islands. Potential GDP is the same on the two islands.
13b. The real wage is now the same on the two islands.
13c. The natural unemployment rate is the same on the two islands.
13d. On Cocoa Island, half the unemployment is the result of job search and the
other half of job rationing. On Plantation Island, all of the unemployment
is the result of job search.

Critical Thinking
14. Starting in 1970, the economy expanded rapidly for three years, with
aggregate demand and aggregate supply increasing. Aggregate supply
increased relatively rapidly compared to aggregate demand because the
price level did not rise much. After that, though, the U.S. economy entered
a recession in which aggregate demand increased rapidly but aggregate
supply decreased. Real GDP decreased and the price level rose rapidly.
Following this period, aggregate demand increased relatively rapidly
compared to aggregate supply. In the early 1980s, a similar recession
occurred. Aggregate demand increased but aggregate supply decreased.
Once again, real GDP decreased and the price level rose rapidly. After that,
both aggregate demand and aggregate supply increased, with aggregate
demand increasing just a bit more rapidly than aggregate supply. Another
recession occurred in 1991-1992, when aggregate demand increased and
aggregate supply was stagnant. After that, both aggregate demand and
aggregate supply increased so that real GDP grew. Aggregate demand
increased a bit more rapidly than did aggregate supply, so the price level
rose. Finally, another recession occurred in 2001 when aggregate demand
increased but aggregate supply slowed and perhaps decreased a bit.
Aggregate supply increased fastest relative to aggregate demand in the
early 1970s and in the 1990s. Aggregate demand increased fastest relative
to aggregate supply in the mid 1970s and early 1980s. In 2002, the economy
was in a below full-employment equilibrium.
15. If the minimum wage were abolished, employment would increase.
Potential GDP would increase and the equilibrium real wage rate would
fall. Students’ views favoring or opposing the elimination of the minimum
wage will vary. Students who favor eliminating the minimum wage will
use the macroeconomic results mentioned above to support their positions.
If they have had a microeconomics class, they might also argue that the
minimum wage is unfair and harms workers who cannot find jobs.
Students who oppose abolishing the minimum wage will argue that
workers who are paid the minimum wage will be harmed if their wages
fall. These students might assert that the macroeconomic effects are so
small that they do not overcome the harm inflicted on these low-income
workers.
16. Real GDP and potential GDP would decrease if the United States adopted
an unemployment insurance scheme similar to the one in Canada.
Students’ views on favoring or opposing the adoption of a similar scheme
will vary. Students in favor of adopting a similar scheme should point to
the difficulties unemployed people suffer as they look for work. They
should assert that a more generous unemployment insurance scheme will
provide major benefits to unemployed workers. Students who oppose
adopting the scheme should point to the adverse macroeconomic
consequences. They should point out that by adopting a similar scheme,
U.S. unemployment would increase.
