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- On a microeconomic demand curve, a decrease in price causes an increase in quantity demanded because the product in question is now relatively less expensive than substitute products. Explain why aggregate demand does not increase for the same reason in response to a decrease in the aggregate price level. In other words, what causes total spending to increase if it is not because goods are now cheaper?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…iv) Using relevant diagrams, illustrate and explain how an increase (decrease) in government spending of $10b would affect aggregate demand, output and price level in the economy. You should assume an upward sloped-aggregate supply curve.
- 5. Fiscal pollcy, the money market, and aggregate demand Suppose there is some hypothetical economy in which households spend $0.50 of each additional dollar they earn and save the $0.50 they have left over. The following graph plots the economy's initial aggregate demand curve (AD1). Suppose now that the government increases its purchases by $2.5 billion. / Tools Use the green line (triangle symbol) on the following graph to show the aggregate demand curve (AD,) after the multiplier effect takes place. Hint: Be sure the new aggregate demand curve (ADs) is parallel to ADj. You can see the slope of ADi by selecting it on the following graph. Suppose that for every increase in the interest rate of one percentage point, the level of investment spending declines by $0.5 billion. Based on the changes made to the money market in the previous scenario, the new interest rate causes the level of investment spending to _____ by____ A-z T Tips Tips Taking the multiplier effect into account, the…13 Which of the following would increase aggregate demand? Increase in savings. Increase in taxation. Decrease in consumption spending. Increase in government spending.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=P
- Refer to the table below. Real Output Demanded, Billions Price Level Real Output Supplied, Billions $ 506 108 $ 513 508 104 512 510 100 510 512 96 507 514 92 502 Instructions: Enter your anwers as whole numbers. A). What is the equilibrium level of output? What is the equilibrium price level? B). Suppose that aggregate demand increases such that the amount of real output demanded rises by $ 7 billion at each price level. Insert the new values for real output demanded in the table below. Real Output Demanded, Billions New Real Output Demanded, Billions Price Level Real Output Supplied, Billions $ 506 108 $ 513 508 104 512 510 100 510 512 96 507 514 92 502 What is the new equilibrium level of output? What is the new equilibrium price level? By what percentage will the price level increase? Will this inflation be demand-pull inflation or will it be cost-push inflation? C) If potential real GDP ( that is, full-employment GDP) is $ 510…3. a) Suppose that the macroeconomic equilibrium is determined in the closed economy (AE = C+I +G). Show and explain the effects of an increase in marginal tax rate (t) on macroeconomic equilibrium. b) Why do you think increase in government expenditure causes crowding-out effect (use graphs when necessary4 We have an aggregate supply curve with a positive slope. Assume that this economy is in recession. In such an economic environment, if both taxes and government spending are increased by $10 billion, what type of change will probably be observed in the price level and real GDP? Both price level and real GDP increase. Price level decreases real GDP increases. Both price level and real GDP decrease. Price level increases, real GDP decreases.
- 11. Explain why the following statements are false. A.) “The aggregate-demand curve slopes downward because it is the horizontal sum of the demand curves for individual goods.” B.) “The long-run aggregate-supply curve is vertical because economic forces do not affect long-run aggregate supply.” C.) “If firms adjusted their prices every day, then the short-run aggregate-supply curve would be horizontal.” D.) “Whenever the economy enters a recession, its long-run aggregate-supply curve shifts to the left.”Consider a hypothetical economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. The following graph shows the economy's initial aggregate demand curve (AD1AD1). Suppose the government increases its purchases by $3.75 billion.