MACROECONOMICS (LOOSELEAF)-PACKAGE
13th Edition
ISBN: 9781337492317
Author: Baumol
Publisher: CENGAGE L
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Question
Chapter 10, Problem 3TY
a
To determine
To ascertain: The comparison of change in aggregate demand.
b)
To determine
To ascertain: The equilibrium level of GDP and price.
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Students have asked these similar questions
The following graph shows several aggregate demand and aggregate supply curves for an economy whose potential output is $5 trillion. The curves
are labelled a, b, c, and d. Three points on the graph are also indicated by grey stars and labelled K, L, and M.
100
90
80
M.
70
60
50
b
40
30
a
20
2
3
4
5
6
7
REAL GDP (Trillions of dollars)
Identify which curve on the previous graph corresponds to each description in the following table. If the curve described does not appear on the graph
choose Not Shown.
Description
b
Not Shown
a
Long-run aggregate supply (LRAS)
Short-run aggregate supply (SRAS) when the economy is at long-run equilibrium
Short-run aggregate supply (SRAS) when there is an inflationary gap
Short-run aggregate supply (SRAS) when there is a recessionary gap
Aggregate demand (AD)
PRICE LE VEL
You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) exports = $20 billion, imports = $40 billion. If the full-employment level of GDP for this economy is $700 billion. Marginal Propensity to Consume (MPC) of the economy is 0.5. How much government purchases would be closing the GDP-gap here? Explain your answer, and show your calculation.
Assume the Potential GDP is $15 trillion dollars. Use the table below to answer the following questions. Assume all values represent trillions of dollars.
Use the table to create two graphs: 1. aggregate expenditure model and 2. an aggregate supply aggregate demand model. Note that the equilibrium in the table above will determine your real GDP and your potential GDP should be plotted in both graphs.
What type of macroeconomic equilibrium does this economy reflect?
Note that the multiplier is 2 because this economy has imports. If Investment expenditures increase by $2.5, how much does GDP increase?
Does the increase in investment expenditures from part C result in a full
employment equilibrium? Why?
Graphically show the effects from part C in our Aggregate Expenditure
Model and Aggregate Supply-Aggregate Demand Model.
Chapter 10 Solutions
MACROECONOMICS (LOOSELEAF)-PACKAGE
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Similar questions
- Answer the following questions, which relate to the aggregate expenditures model:a. If Ca is $100, Ig is $50, Xn is -$10, and G is $30, what is the economy’s equilibrium GDP?b. If real GDP in an economy is currently $200, Ca is $100, Ig is $50, Xn is -$10, and G is $30, will the economy’s real GDP rise, fall, or stay the same?c. Suppose that full-employment (and full-capacity) output in an economy is $200. If Ca is $150, Ig is $50, Xn is -$10, and G is $30, what will be the macroeconomic result?arrow_forwardIllustrate how the information from the Income-Expenditure model is embedded in the Aggregate Demand curve. In your illustration, use two graphs and three aggregate price levels, P1 < P2 < P3.arrow_forwardSuppose an economy is operating at point A on the graph showing aggregate demand. A decrease in the aggregate price level causes the economy to move to point B On the graph showing aggregate expenditures (AE), show the change caused by the movement from point A to point B on the aggregate demand curve. Aggregate price level Aggregate demand Aggregate output Aggregate expenditures Income (Y) Y-AE AEarrow_forward
- Consider the table on the right, which shows business investment in inventories for each quarter from the first quarter of 2007 to the first quarter of 2012, measured in millions of 2007 dollars. Provide a macroeconomic explanation for this pattern. (Hint: When did the recession during this period begin and end?) The negative growth of inventories indicates a period of OA. inflation since inventories needed to be reduced in the face of increasing storage cost OB. recession because demand was met by drawing down past inventories and production did not increase. OC. recovery since inventories needed to be used to meet demand. OD. recession because inventories increased due to lack of demand Year 2007 2008 2009 2010 2011 2012 2013 Quarter Q1 308889 Q2 Q3 Q4 R288828 Q1 Q2 Q3 Q4 Q1 228892889 Q2 Q3 Q4 Q1 Q2 Inventory Investment (millions of 2007 dollars) $3360 - 2822 15,570 19,644 6061 9512 11,856 4699 -2364 7779 -4807 - 4807 2663 2508 4841 -6805 8965 12,153 6462 2179 2061 7298 14,091 3875…arrow_forwardThe Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that a = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 95. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 85, 90, 95, 100, and 105. PRICE LEVEL 125 120 115 110 105 100 95 90 85 80 75 0 + 10 20 ¶¶ 30 40 50 60 70 OUTPUT (Billions of dollars) + 80 90 100 -O AS LRAS (?) The short-run quantity of output supplied by firms will rise above the natural level of output when the actual price level falls…arrow_forwardThe Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that a = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $60 billion of real GDP and that people expect a price level of 110. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 100, 105, 110, 115, and 120. (? 125 120 AS 115 110 105 LRAS 100 W 95 90 85 80 75 10 20 30 40 50 60 70 80 100 06 OUTPUT (Billions of dollars) The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level the price level that people…arrow_forward
- Identify the direction of the change during a recession in each of the following: consumption expenditures, investment expenditures, and unemployment.arrow_forwardThe following graph shows the aggregate demand curve in a hypothetical economy. Assume that the economy's money supply remains fixed.arrow_forwardThe graphs illustrate an initial equilibrium for the economy. Suppose that the government increases taxes. Use the graphs to show the new positions of aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) in both the short run and the long run, as well as the short-run and long-run equilibriums resulting from this change. Then, indicate what happens to the price level and GDP in the short run and in the long run. Aggregate price level Short-run graph LRAS SRAS Short-run equilibrium Real GDP AD Aggregate price level Long-run graph LRAS Long-run equilibrium Real GDP AD SRAS gatearrow_forward
- You will draw four separate Aggregate-Demand/Aggregate-Supply graphs. Each graph will have one curve shift. Be sure to label axis, curves, and equilibrium. Change colors to show the shift and label the new equilibrium. Draw an ADAS graph at equilibrium. Suppose the interest rates on loans on capital goods decrease. Which curve will shift? Draw the new equilibrium. Draw an ADAS graph at equilibrium. Suppose there is an decrease in government spending. Which curve will shift? Draw the new equilibrium. Draw an ADAS graph at equilibrium. Suppose the income of our trading partners increase. Which curve will shift? Draw the new equilibrium. Draw an ADAS graph at equilibrium. Suppose there is widespread concern that prices will continue to rise in the future. Which curve will shift? Draw the new equilibrium.arrow_forwardThe graph models an economy in equilibrium with a real GDP of $180 billion. Suppose that consumers' expectations about future incomes change, causing unplanned inventory investment to increase by $30 billion. Shift the planned aggregate expenditure (AE) line to show the effect of this change. *Image* 1) This change will cause the equilibrium level of real GDP to a) decrease. b) remain unchanged. c) increase. 2) By how much will GDP change once the new equilibrium is reached? If GDP will decrease, be sure to include a negative sign. GDP change: $ ________ billionarrow_forwardConsumption spending was $150$150 billion, investment spending was $40$40 billion, government spending was $50$50 billion, spending on exports was $42$42billion, and spending on imports was $35$35 billion. The price level increases, resulting in a decline in investment spending by 30%30%. Consumption spending decreases by 10%10%.If other factors stay at the same level, determine aggregate demand after the price level increased. Enter your answer in the box below.arrow_forward
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