Macroeconomics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506756
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Question
Chapter 11, Problem 9CQ
To determine
The impact of increase in aggregate demand when the economy has large
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Suppose that actual output is $120 billion and potential (full-employment) output is $156 billion. What is an output gap in this hypothetical economy? Based on your estimate of the output gap, would you expect the unemployment level to be higher or lower than usual?
Why does the effect of a given increase in aggregate demand have a larger effect on real output in the short run, the more excess capacity exists in the economy?
Suppose that the inflation rate remains constant while output increases and the unemployment rate decreases. Using an aggregate demand and supply graph, show how this scenario is possible.
Chapter 11 Solutions
Macroeconomics: Private and Public Choice (MindTap Course List)
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- What is an effificiency wage? How might payment of an above-market wage reduce shirking by employees and reduce worker turnover? How might efficiency wages contribute to downward wage inflexibility, at least for a time, when aggregate demand declines?arrow_forwardWhy unemployment results when Aggregate Demand is lesser than Aggregate Supply in the economy?arrow_forwardAssume that the economy is in equilibrium when aggregate demand curves shifts to the right. What happens to the economy in the short-run? the GDP gap becomes positive. Allowed to self-correct, the economy will experience higher inflation. the GDP gap becomes negative. Allowed to self-correct, the economy will experience higher inflation. the GDP gap does not change, but the inflation rate will rise. there is not enough information to answer the question.arrow_forward
- With reference to the Keynesian approach, explain the main components of aggregate demandarrow_forwardSuppose labor demand decreases because of negative supply shock. How would you expect such a change to affect output, employment, and the real wage in the classical model?arrow_forwardHow would you explain the logic of a potential short run trade-off between unemployment and inflation to the President? In other words, why might there be an inverse relationship between unemployment and inflation over the short run when the economy is very close to full employment and no technological advances are occurring simultaneously?arrow_forward
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