Consider a closed economy, where wages are sticky in the short run. The consumption function is C = co + C₁ (Y-T), where the marginal propensity to consume c₁ is equal to 0.8. Initially the economy is i equilibrium at Y = Y* and P = Pº, where Pe is the price level that was expected when agents agreed their fixed nominal wage contracts. The short-run aggregate supply curve (SRAS) is horizontal. Suddenly the government increases government spending G by $200. For the following questions, if you think a variable goes up by (say) $50, just enter 50 as your answer. If you think a variable goes down by $50, enter -50 as your answer. If you think a variable doesn't change at all, enter 0 as your answer. 10. By how much will output Y change in the short run? 11. By how much will consumption C change in the short run?

Consider a closed economy, where wages are sticky in the short run. The consumption function is C = co + C₁ (Y-T), where the marginal propensity to consume c₁ is equal to 0.8. Initially the economy is i equilibrium at Y = Y* and P = Pº, where Pe is the price level that was expected when agents agreed their fixed nominal wage contracts. The short-run aggregate supply curve (SRAS) is horizontal. Suddenly the government increases government spending G by $200. For the following questions, if you think a variable goes up by (say) $50, just enter 50 as your answer. If you think a variable goes down by $50, enter -50 as your answer. If you think a variable doesn't change at all, enter 0 as your answer. 10. By how much will output Y change in the short run? 11. By how much will consumption C change in the short run?

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter20: Monetary Policy

Section20.A: Policy Disputes Using The Self Correcting Aggregate Demand And Supply Model

Problem 5SQ

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Suppose the economy is initially at K. Which of the following statements best explains how the economy responds to restore long-run macroeconomic equilibrium? Select one: a. Over time, the aggregate demand curve will shift to the right until long-run equilibrium is restored at J and the gap is closed. b. Rising unemployment puts pressure on nominal wages to fall. The SRAS curve shifts right to SRAS1 closing the gap at H. c. In response to rising prices, firms will increase production moving along SRAS2 until long- run equilibrium is restored at J and the gap is closed. d. Rising unemployment puts pressure on nominal wages to fall. Firms employ more workers moving along SRAS2 until long-run equilibrium is restored at J and the gap is closed.
If equilibria below potential output are self-correcting, the economy will spend a great deal of time on the horizontal part of the aggregate supply curve. True (or) false
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Assuming Aggregate Demand and Aggregate Supply are initially at ADo and ASo respectively, which of the following explains the adjustment towards long-run equilibrium depicted in Figure B? a. Unemployment (resulting from the short-run equilibrium being below LRAS) causes wages to decline, which increases AS till long-run equilibrium is attained at full employment level of income and a lower price level. b. Government spending is increased, increasing AD to a level sufficient to attain long-run equilibrium at full employment level of income and a higher price level c. In attempting to produce beyond the economy's natural level of GDP, producers bid up wages and prices of other resources, causing the AS to decrease to the point where long-run equilibrium is restored. d. Taxes are increased reducing AD to a level consistent with long-run equilibrium
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