Macroeconomists would suggest that an economy experiencing high unemployment should adopt policies to O reduce aggregate demand. O increase aggregate demand. O increase aggregate supply. O reduce aggregate supply.
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- Only typed answer a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ ___billion b. Assuming the MPC in this nation is 0.75, how much do government purchases need to change to shift aggregate demand by the amount you found in part a? $ ___billion c. Now suppose the MPC is 0.6. To restore the economy to its long-run equilibrium, aggregate demand must be changed by $ ___billion and government purchases must be changed by $ ___billion.In 1939, with the U.S. economy not yet fullyrecovered from the Great Depression, PresidentFranklin Roosevelt proclaimed that Thanksgivingwould fall a week earlier than usual so that theshopping period before Christmas would be longer.(The policy was dubbed “Franksgiving.”) Explainwhat President Roosevelt might have been trying toachieve, using the model of aggregate demand andaggregate supplyWhen the economy is experiencing a recession, why would aneoclassical e conomist be unlikely toargue for aggressive policy to stimulate aggregate demandand return the economy to full employment? Explain your answer.
- Suppose an economy is in long-run equilibrium.a. Use the model of aggregate demand andaggregate supply to illustrate the initialequilibrium (call it point A). Be sure to includeboth short-run aggregate supply and long-runaggregate supply.b. The central bank raises the money supply by5 percent. Use your diagram to show whathappens to output and the price level as theeconomy moves from the initial equilibrium to thenew short-run equilibrium (call it point B).c. Now show the new long-run equilibrium (call itpoint C). What causes the economy to move frompoint B to point C?d. According to the sticky-wage theory of aggregatesupply, how do nominal wages at point Acompare with nominal wages at point B? How donominal wages at point A compare with nominalwages at point C?e. According to the sticky-wage theory of aggregatesupply, how do real wages at point A comparewith real wages at point B? How do real wages atpoint A compare with real wages at point C?f. Judging by the impact of the money…For each of the following scenarios, tell a story and predict theeffects on the equilibrium levels of aggregate output (Y) and theinterest rate (r):a. During 2005, the Federal Reserve was tightening monetarypolicy in an attempt to slow the economy. Congress passed asubstantial cut in the individual income tax at the same time.b. During the summer of 2003, Congress passed and PresidentGeorge W. Bush signed the third tax cut in 3 years. Many ofthe tax cuts took effect in 2005. Assume that the Fed holdsMs fixed.c. In 1993, the government raised taxes. At the same time, theFed was pursuing an expansionary monetary policy.d. In 2005, conditions in Iraq led to a sharp drop in consumerconfidence and a drop in consumption. Assume that the Fedholds the money supply constant.e. The Fed attempts to increase the money supply to stimulatethe economy, but plants are operating at 65 percent of theircapacities and businesses are pessimistic about the future.Refer to the following figure 1. For this economy, if the actual price level exceeds theexpected price level, how much output will the economyproduce in the short-run? A)$17 trillionB)$17.2 trillionC)$16.7 trillionD) Both A and C.2. Given the situation in part (a), this economy wouldexperience A) a recessionary gap of $0.3 trillionB) an expansionary gap of $0.2 trillionC) neither a recessionary gap nor an expansionary gap.D) an expansionary gap of $17.2 trillion. 3. Given the situation in part (a), in this economy (circlethe letter representing the right answer below)A) the actual rate of unemployment would be less than thenatural rate of unemployment.B) the actual rate of unemployment would be above the naturalrate of unemployment.C) the actual rate of unemployment would be equal to thenatural rate of unemployment.D)none of the above.4. In this economy, given the situation in part (a), in thelong-run (circle the letter representing the right answerbelow)A) the nominal wage…
- 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 B1. In the diagram for this exercise, use aggregate demand and short-run and long-run aggregate supply curves to show an economy at a short-run equilibrium with a contrac- tionary gap of $0.5 trillion when potential output is $10 trillion.Then illustrate how the gap would close in the long run if the economy is self-correcting. 2. In the diagram, use aggregate demand and short-run and long-run aggregate supply curves to show an economy at a short-run equilibrium with an expansionary gap of $0.5 trillion when potential output is $10 trillion.Then illus- trate how the gap would close in the long run using an activist approach.Consider two policies, a tax cut that lasts for only 2 years and a tax cut that is expected to be permanent. Which policy will stimulate greater spending by consumers? Which policy will have the greater impact on aggregate demand? Select one: a. permanent tax cut; 2-year tax cut b. permanent tax cut; permanent tax cut c. 2-year tax cut; 2-year tax cut d. 2-year tax cut; permanent tax cut
- 18 - : If aggregate demand increases in an economy while aggregate demand is constant in the short run, which of the following statements is correct for the new equilibrium point?A) price decreases and national income increasesB) price rises national income risesC) price increases and national income does not changeD) price goes up and national income goes downE) price decreases and national income decreases.19 - : In which of the following expressions is the equation of change given correctly?A) MV=VK B) MT=PV C) MV=PT D) MP=VY E) MV=P3)Show and explain the effects of an increase in aggregate demand in the long-run and short-run by using AD–AScurves.2)Show and explain by using a graph, what will happen to the price level and real GDP if the quantity of moneyincreases and the increase is not anticipated; that is, the price level is not expected to change.1)By using aggregate demand (AD) and aggregate supply (AS) curves, show and explain the effects of ananticipated increase in money supply on macroeconomic equilibrium according to Rational ExpectationsHypothesis.what are the aggregate demand consequences of Hurricane Katrinaor a war in the Middle East?