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- In the 1970s a common practice was to estimate a distributed lag modelrelating changes in nominal gross domestic product (Y) to current andpast changes in the money supply (X). Under what assumptions will thisregression estimate the causal effects of money on nominal GDP? Arethese assumptions likely to be satisfied in a modern economy like that ofthe United States?Assume an economy operates in the intermediaterange of its aggregate supply curve. State thedirection of shift for the aggregate demandor aggregate supply curve for each of thefollowing changes in conditions. What is theeffect on the price level? On real GDP? Onemployment?a. The price of crude oil rises significantly.b. Spending on national defense doubles.c. The costs of imported goods increase.d. An improvement in technology raises laborproductivity.Consider the following actual and forecast demandlevels for Big Mac hamburgers at a local McDonald’s restaurant:DAY ACTUAL DEMAND FORECAST DEMANDMonday 88 88Tuesday 72 88Wednesday 68 84Thursday 48 80FridayThe forecast for Monday was derived by observing Monday’sdemand level and setting Monday’s forecast level equal to this demand level. Subsequent forecasts were derived by using expo-nential smoothing with a smoothing constant of 0.25. Using this exponential smoothing method, what is the forecast for Big Macdemand for Friday?
- The imaginary country of Harris Island has theaggregate supply and aggregate demand curves as Table24.3 shows. a. Plot the AD/AS diagram. Identify theequilibrium.b. Would you expect unemployment in thiseconomy to be relatively high or low?c. Would you expect concern about inflation in thiseconomy to be relatively high or low?d. Imagine that consumers begin to lose confidenceabout the state of the economy, and so ADbecomes lower by 275 at every price level.Identify the new aggregate equilibrium.e. How will the shift in AD affect the originaloutput, price level, and employment?Illustrate and interpretthe short-run and longrun effects of temporary and permanentsupply shocksII. Consider the following IS-LM model:? = 200 + 0.25??? = 150 + 0.25? − 1,000?? = 250? = 200(?/?)? = 2? − 8,000??/? = 1,600a. Derive the IS relation. (Hint: You want an equation with ? on the left side and everythingelse on the right.)b. Derive the LM relation. (Hint: It will be convenient for later use to rewrite this equationwith ? on the left side and everything else on the right.)c. Solve for equilibrium real output. (Hint: Substitute the expression for the interest rategiven by the LM equation into the IS equation and solve for output.)d. Solve for the equilibrium interest rate. (Hint: Substitute the value you obtained for ? inpart (c) into either the IS or LM equation and solve for ?.)e. Solve for the equilibrium values of ? and ? and verify the value you obtained for ? byadding ?, ?, and ?.f. Now suppose that the money supply increases to ?/? = 1,840. Solve for ?, ?, ?, and ?,and describe in words the effects of an expansionary monetary policy.g. Set ?/? equal to its initial…
- Explain the relationship that economic variables can have with businesscycles. These have both direction and timing. Give an example economicvariable of each combination of direction timing. Of these two attributes, ifyou had exclusive access to a reliable variable, which relationships wouldyou want this variable to have for forecasting purposesPossitive short run relatioship between the prices level for outpput and reall gdp holding the prices of inputs fexed a- longo-run aggregate supply SRAS curve b- long run aggregate demand SRAS curve c- short eun aggregate supply SRAS curve d- short-run aggregate demand SRAS curveWhat are the factors other than price that can shift aggregate demand curve interms of investment and consumption? Also explain graphically.
- If price level is held constant and we decrease consumption, the aggregate demand curve will shift to theSelect one:O a. NortheastO b. SouthwestO cc Neither A nor B2. Show a AD-AS graph inflation in the short run and the shift in the SAS necessary to eliminate it.Will the shift of SRAS to the right tend to make theequilibriumquantityandpricelevelhigherorlower? What about a shift of SRAS to the left?
