Principles of Macroeconomics (12th Edition)
12th Edition
ISBN: 9780134061115
Author: CASE
Publisher: PEARSON
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Question
Chapter 11, Problem 5.4P
Subpart (a):
To determine
The graphical illustration changes in the price level and equilibrium point.
Subpart (b):
To determine
The graphical illustration changes in the price level and equilibrium point.
Subpart (c):
To determine
The graphical illustration changes in the price level and equilibrium point.
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Q1: Illustrate each of the following situations with a graph showing AS and AD curves, and explain whathappens to the equilibrium values of the price level and aggregate output:a: A decrease in G with the money supply held constant by the Fed.b: a decrease in the price of oil with the money supply held constant by the Fed.
The following graph shows a hypothetical economy in long-run equilibrium at an expected price level of 120 and a natural output level of $600 billion. Suppose firms become pessimistic about future business conditions and cut back on investment spending.
Using the graph, shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the business pessimism.
In the short run, the decrease in investment spending associated with business pessimism causes the price level to (rise above/fall below) the price level people expected and the quantity of output to (rise above/fall below) the natural level of output. The business pessimism will cause the unemployment rate to (rise above/fall below) the natural rate of unemployment in the short run.
Again, the following graph shows a hypothetical economy experiencing long-run equilibrium at the expected price level of 120 and natural output level of $600 billion, prior to the…
By using aggregate supply and demand curves to illustrate your points, discuss the impacts of the following events on the price level and on equilibrium GDP (Y) in the short run:
a. A tax cut holding government purchases constant with the economy operating at near full capacity
b. An increase in the money supply during a period of high unemployment and excess industrial capacity
c. An increase in the price of oil caused by a war in the Middle East, assuming that the Central Bank attempts to keep interest rates constant by accommodating inflation
d. An increase in taxes and a cut in government spending supported by a cooperative Fed acting to keep output from falling
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Principles of Macroeconomics (12th Edition)
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