Effect on Aggregate Demand and Supply.

Question

Want to see more full solutions like this?

Answer 1

Question

Chapter 12, Problem 6RQ

Subpart (a):

To determine

Effect on Aggregate Demand and Supply.

Subpart (a):

Expert Solution

Explanation of Solution

When consumers fear of an impending economic depression, their spending decline and they tend to save more. This leads to a decrease in AD curve. This can be explained by using figure 1.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 1

In figure 1, horizontal axis represents the real GDP(Gross Domestic Product) and vertical axis represents price level. In this case, the AD curve shifts left (from AD₁ to AD₂), and this moves the equilibrium position from a to c, thus there is a decline in the output (from Q_f to Q₁) and a decline in the price level (from P₁ to P₂), assuming no ratchet effect.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (b):

To determine

Effect on Aggregate Demand and Supply.

Subpart (b):

Expert Solution

Explanation of Solution

When a new tax is imposed on producers, cost of production comes up and there is no incentive to produce more. This leads to a decline in AS curve. This can be explained using figure 2.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 2

In figure 2, horizontal axis represents the real GDP and vertical axis represents price level. In this case, the AS curve shifts left (from AS to AS₁), this moves the equilibrium position from E to T, thus there is a decline in the output (from Q to Q₁) and a rise in the price level (from P to P₁).

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (c):

To determine

Effect on Aggregate Demand and Supply.

Subpart (c):

Expert Solution

Explanation of Solution

Figure 3 can explain the shift in AD curve due to reduction in interest rates at each price level. In figure 3, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 3

A reduction in interest rates decreases the borrowing cost increases the spending.

This leads to a rightward shift of AD curve from AD₁ to AD₂. Thus, it brings the output and price level up. The output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (d):

To determine

Effect on Aggregate Demand and Supply.

Subpart (d):

Expert Solution

Explanation of Solution

A major increase in spending shifts the AD curve to right. Figure 4 is used to explain this situation. In figure 4, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 4

Government expenditure is a key determinant of changes in the aggregate demand. The increase in government spending (spending for health care) increases the aggregate demand leading to a shift of AD curve from AD₁ to AD₂. Any real improvements in healthcare resulting from the spending would ultimately increase the productivity, thereby shifting the AS curve to the right (from AS₁ to AS₂). The equilibrium moves from a to c leading to an increase in output (from Q₁ to Q₃) . It will also move the price level up from P₁ to P₃.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (e):

To determine

Effect on Aggregate Demand and Supply.

Subpart (e):

Expert Solution

Explanation of Solution

The general expectation of surging inflation in the near future will increase the aggregate demand today because the consumers will want to buy products before their prices escalate. This can be illustrated using figure 3. As a result, there will be a rightward shift of AD curve from AD₁ to AD₂ which brings the output and price level up. In figure 3, the output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (f):

To determine

Effect on Aggregate Demand and Supply.

Subpart (f):

Expert Solution

Explanation of Solution

Figure 5 is used to explain this case. In figure 5, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 5

As oil prices fall (oil is an imported resource) due to the disintegration of OPEC, it increases the U.S. aggregate supply. As a result, there will be a rightward shift of AS curve from AS to AS₁. This brings the output level up from Q to Q₁ and price level down from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (g):

To determine

Effect on Aggregate Demand and Supply.

Subpart (g):

Expert Solution

Explanation of Solution

A reduction in the personal income tax rates raises take-home income increases consumer purchases at each possible price level. This is illustrated in figure 3. Tax cuts shift the aggregate demand curve to the right from AD₁ to AD₂ which brings the output and price level up. In figure 3, the output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (h):

To determine

Effect on Aggregate Demand and Supply.

Subpart (h):

Expert Solution

Explanation of Solution

The sizable increase the labor productivity with no change in nominal wages will increase the overall productivity as more output is available for the given input. This increases the aggregate supply thereby shifting the AS curve to the right from AS to AS₁ (Refer Figure 5). This leads to an increase in output (from Q to Q₁) and a decrease in price level from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (i):

To determine

Effect on Aggregate Demand and Supply.

Subpart (i):

Expert Solution

Explanation of Solution

This case can be explained using Figure 2. When there is an increase in nominal wages with no change in productivity, it increases per unit cost of production. This force the AS curve to shift left (from AS to AS₁). The equilibrium position moves from E to T, thus there are a decline in the output (from Q to Q₁) and a rise in the price level (from P to P₁).

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (j):

To determine

Effect on Aggregate Demand and Supply.

Subpart (j):

Expert Solution

Explanation of Solution

Figure 6 shows the impact of increasing demand and decreasing supply.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 6

Figure 6 is used to explain this condition. The horizontal axis in Figure 6 measures the real domestic output whereas price level is measured by the vertical axis. A rise in net exports (higher exports relative to imports) shifts the aggregate demand curve to the right (from AD₁ to AD₂). But, due to the higher input prices, per unit cost is more, leading to a shift of the aggregate supply curve to the left from AS₁ to AS₂. This leads to an increase in output from Q to Q₁ along with an increase in price level from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

9. True or false? If the statement is false, explain why: LO4 a. An internally held public debt is like a debt of the left hand owed to the right hand. b. The Federal Reserve and federal government agencies hold more than half the public debt. c. As a percentage of GDP, the federal debt held by the public was smaller in 2010 than it was in 1990. d. As a percentage of GDP, the total U.S. public debt is the highest such debt among the world’s advanced industrial nations.

Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy's multiplier is 4. If household wealth falls by 6 percent because of declining house values, and the real interest rate falls by 2 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? In what direction and by how much will it eventually shift?

Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy�s multiplier is 3. If household wealth falls by 6 percent because of declining house values, and the real interest rate falls by 2 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? The aggregate demand curve will shift_____ by $____ billion. In what direction and by how much will it eventually shift? The aggregate demand curve will shift_____ by $____ billion..

Answer 2

Question

Chapter 12, Problem 6RQ

Subpart (a):

To determine

Effect on Aggregate Demand and Supply.

Subpart (a):

Expert Solution

Explanation of Solution

When consumers fear of an impending economic depression, their spending decline and they tend to save more. This leads to a decrease in AD curve. This can be explained by using figure 1.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 1

In figure 1, horizontal axis represents the real GDP(Gross Domestic Product) and vertical axis represents price level. In this case, the AD curve shifts left (from AD₁ to AD₂), and this moves the equilibrium position from a to c, thus there is a decline in the output (from Q_f to Q₁) and a decline in the price level (from P₁ to P₂), assuming no ratchet effect.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (b):

To determine

Effect on Aggregate Demand and Supply.

Subpart (b):

Expert Solution

Explanation of Solution

When a new tax is imposed on producers, cost of production comes up and there is no incentive to produce more. This leads to a decline in AS curve. This can be explained using figure 2.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 2

In figure 2, horizontal axis represents the real GDP and vertical axis represents price level. In this case, the AS curve shifts left (from AS to AS₁), this moves the equilibrium position from E to T, thus there is a decline in the output (from Q to Q₁) and a rise in the price level (from P to P₁).

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (c):

To determine

Effect on Aggregate Demand and Supply.

Subpart (c):

Expert Solution

Explanation of Solution

Figure 3 can explain the shift in AD curve due to reduction in interest rates at each price level. In figure 3, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 3

A reduction in interest rates decreases the borrowing cost increases the spending.

This leads to a rightward shift of AD curve from AD₁ to AD₂. Thus, it brings the output and price level up. The output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (d):

To determine

Effect on Aggregate Demand and Supply.

Subpart (d):

Expert Solution

Explanation of Solution

A major increase in spending shifts the AD curve to right. Figure 4 is used to explain this situation. In figure 4, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 4

Government expenditure is a key determinant of changes in the aggregate demand. The increase in government spending (spending for health care) increases the aggregate demand leading to a shift of AD curve from AD₁ to AD₂. Any real improvements in healthcare resulting from the spending would ultimately increase the productivity, thereby shifting the AS curve to the right (from AS₁ to AS₂). The equilibrium moves from a to c leading to an increase in output (from Q₁ to Q₃) . It will also move the price level up from P₁ to P₃.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (e):

To determine

Effect on Aggregate Demand and Supply.

Subpart (e):

Expert Solution

Explanation of Solution

The general expectation of surging inflation in the near future will increase the aggregate demand today because the consumers will want to buy products before their prices escalate. This can be illustrated using figure 3. As a result, there will be a rightward shift of AD curve from AD₁ to AD₂ which brings the output and price level up. In figure 3, the output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (f):

To determine

Effect on Aggregate Demand and Supply.

Subpart (f):

Expert Solution

Explanation of Solution

Figure 5 is used to explain this case. In figure 5, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 5

As oil prices fall (oil is an imported resource) due to the disintegration of OPEC, it increases the U.S. aggregate supply. As a result, there will be a rightward shift of AS curve from AS to AS₁. This brings the output level up from Q to Q₁ and price level down from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (g):

To determine

Effect on Aggregate Demand and Supply.

Subpart (g):

Expert Solution

Explanation of Solution

A reduction in the personal income tax rates raises take-home income increases consumer purchases at each possible price level. This is illustrated in figure 3. Tax cuts shift the aggregate demand curve to the right from AD₁ to AD₂ which brings the output and price level up. In figure 3, the output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (h):

To determine

Effect on Aggregate Demand and Supply.

Subpart (h):

Expert Solution

Explanation of Solution

The sizable increase the labor productivity with no change in nominal wages will increase the overall productivity as more output is available for the given input. This increases the aggregate supply thereby shifting the AS curve to the right from AS to AS₁ (Refer Figure 5). This leads to an increase in output (from Q to Q₁) and a decrease in price level from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (i):

To determine

Effect on Aggregate Demand and Supply.

Subpart (i):

Expert Solution

Explanation of Solution

This case can be explained using Figure 2. When there is an increase in nominal wages with no change in productivity, it increases per unit cost of production. This force the AS curve to shift left (from AS to AS₁). The equilibrium position moves from E to T, thus there are a decline in the output (from Q to Q₁) and a rise in the price level (from P to P₁).

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (j):

To determine

Effect on Aggregate Demand and Supply.

Subpart (j):

Expert Solution

Explanation of Solution

Figure 6 shows the impact of increasing demand and decreasing supply.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 6

Figure 6 is used to explain this condition. The horizontal axis in Figure 6 measures the real domestic output whereas price level is measured by the vertical axis. A rise in net exports (higher exports relative to imports) shifts the aggregate demand curve to the right (from AD₁ to AD₂). But, due to the higher input prices, per unit cost is more, leading to a shift of the aggregate supply curve to the left from AS₁ to AS₂. This leads to an increase in output from Q to Q₁ along with an increase in price level from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Question

Chapter 12, Problem 6RQ

Subpart (a):

To determine

Effect on Aggregate Demand and Supply.

Subpart (a):

Expert Solution

Explanation of Solution

When consumers fear of an impending economic depression, their spending decline and they tend to save more. This leads to a decrease in AD curve. This can be explained by using figure 1.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 1

In figure 1, horizontal axis represents the real GDP(Gross Domestic Product) and vertical axis represents price level. In this case, the AD curve shifts left (from AD₁ to AD₂), and this moves the equilibrium position from a to c, thus there is a decline in the output (from Q_f to Q₁) and a decline in the price level (from P₁ to P₂), assuming no ratchet effect.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (b):

To determine

Effect on Aggregate Demand and Supply.

Subpart (b):

Expert Solution

Explanation of Solution

When a new tax is imposed on producers, cost of production comes up and there is no incentive to produce more. This leads to a decline in AS curve. This can be explained using figure 2.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 2

In figure 2, horizontal axis represents the real GDP and vertical axis represents price level. In this case, the AS curve shifts left (from AS to AS₁), this moves the equilibrium position from E to T, thus there is a decline in the output (from Q to Q₁) and a rise in the price level (from P to P₁).

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (c):

To determine

Effect on Aggregate Demand and Supply.

Subpart (c):

Expert Solution

Explanation of Solution

Figure 3 can explain the shift in AD curve due to reduction in interest rates at each price level. In figure 3, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 3

A reduction in interest rates decreases the borrowing cost increases the spending.

This leads to a rightward shift of AD curve from AD₁ to AD₂. Thus, it brings the output and price level up. The output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (d):

To determine

Effect on Aggregate Demand and Supply.

Subpart (d):

Expert Solution

Explanation of Solution

A major increase in spending shifts the AD curve to right. Figure 4 is used to explain this situation. In figure 4, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 4

Government expenditure is a key determinant of changes in the aggregate demand. The increase in government spending (spending for health care) increases the aggregate demand leading to a shift of AD curve from AD₁ to AD₂. Any real improvements in healthcare resulting from the spending would ultimately increase the productivity, thereby shifting the AS curve to the right (from AS₁ to AS₂). The equilibrium moves from a to c leading to an increase in output (from Q₁ to Q₃) . It will also move the price level up from P₁ to P₃.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (e):

To determine

Effect on Aggregate Demand and Supply.

Subpart (e):

Expert Solution

Explanation of Solution

The general expectation of surging inflation in the near future will increase the aggregate demand today because the consumers will want to buy products before their prices escalate. This can be illustrated using figure 3. As a result, there will be a rightward shift of AD curve from AD₁ to AD₂ which brings the output and price level up. In figure 3, the output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (f):

To determine

Effect on Aggregate Demand and Supply.

Subpart (f):

Expert Solution

Explanation of Solution

Figure 5 is used to explain this case. In figure 5, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 5

As oil prices fall (oil is an imported resource) due to the disintegration of OPEC, it increases the U.S. aggregate supply. As a result, there will be a rightward shift of AS curve from AS to AS₁. This brings the output level up from Q to Q₁ and price level down from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (g):

To determine

Effect on Aggregate Demand and Supply.

Subpart (g):

Expert Solution

Explanation of Solution

A reduction in the personal income tax rates raises take-home income increases consumer purchases at each possible price level. This is illustrated in figure 3. Tax cuts shift the aggregate demand curve to the right from AD₁ to AD₂ which brings the output and price level up. In figure 3, the output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (h):

To determine

Effect on Aggregate Demand and Supply.

Subpart (h):

Expert Solution

Explanation of Solution

The sizable increase the labor productivity with no change in nominal wages will increase the overall productivity as more output is available for the given input. This increases the aggregate supply thereby shifting the AS curve to the right from AS to AS₁ (Refer Figure 5). This leads to an increase in output (from Q to Q₁) and a decrease in price level from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (i):

To determine

Effect on Aggregate Demand and Supply.

Subpart (i):

Expert Solution

Explanation of Solution

This case can be explained using Figure 2. When there is an increase in nominal wages with no change in productivity, it increases per unit cost of production. This force the AS curve to shift left (from AS to AS₁). The equilibrium position moves from E to T, thus there are a decline in the output (from Q to Q₁) and a rise in the price level (from P to P₁).

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (j):

To determine

Effect on Aggregate Demand and Supply.

Subpart (j):

Expert Solution

Explanation of Solution

Figure 6 shows the impact of increasing demand and decreasing supply.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 6

Figure 6 is used to explain this condition. The horizontal axis in Figure 6 measures the real domestic output whereas price level is measured by the vertical axis. A rise in net exports (higher exports relative to imports) shifts the aggregate demand curve to the right (from AD₁ to AD₂). But, due to the higher input prices, per unit cost is more, leading to a shift of the aggregate supply curve to the left from AS₁ to AS₂. This leads to an increase in output from Q to Q₁ along with an increase in price level from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 12, Problem 6RQ

Subpart (a):

To determine

Effect on Aggregate Demand and Supply.

Subpart (a):

Expert Solution

Explanation of Solution

When consumers fear of an impending economic depression, their spending decline and they tend to save more. This leads to a decrease in AD curve. This can be explained by using figure 1.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 1

In figure 1, horizontal axis represents the real GDP(Gross Domestic Product) and vertical axis represents price level. In this case, the AD curve shifts left (from AD₁ to AD₂), and this moves the equilibrium position from a to c, thus there is a decline in the output (from Q_f to Q₁) and a decline in the price level (from P₁ to P₂), assuming no ratchet effect.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (b):

To determine

Effect on Aggregate Demand and Supply.

Subpart (b):

Expert Solution

Explanation of Solution

When a new tax is imposed on producers, cost of production comes up and there is no incentive to produce more. This leads to a decline in AS curve. This can be explained using figure 2.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 2

In figure 2, horizontal axis represents the real GDP and vertical axis represents price level. In this case, the AS curve shifts left (from AS to AS₁), this moves the equilibrium position from E to T, thus there is a decline in the output (from Q to Q₁) and a rise in the price level (from P to P₁).

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (c):

To determine

Effect on Aggregate Demand and Supply.

Subpart (c):

Expert Solution

Explanation of Solution

Figure 3 can explain the shift in AD curve due to reduction in interest rates at each price level. In figure 3, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 3

A reduction in interest rates decreases the borrowing cost increases the spending.

This leads to a rightward shift of AD curve from AD₁ to AD₂. Thus, it brings the output and price level up. The output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (d):

To determine

Effect on Aggregate Demand and Supply.

Subpart (d):

Expert Solution

Explanation of Solution

A major increase in spending shifts the AD curve to right. Figure 4 is used to explain this situation. In figure 4, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 4

Government expenditure is a key determinant of changes in the aggregate demand. The increase in government spending (spending for health care) increases the aggregate demand leading to a shift of AD curve from AD₁ to AD₂. Any real improvements in healthcare resulting from the spending would ultimately increase the productivity, thereby shifting the AS curve to the right (from AS₁ to AS₂). The equilibrium moves from a to c leading to an increase in output (from Q₁ to Q₃) . It will also move the price level up from P₁ to P₃.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (e):

To determine

Effect on Aggregate Demand and Supply.

Subpart (e):

Expert Solution

Explanation of Solution

The general expectation of surging inflation in the near future will increase the aggregate demand today because the consumers will want to buy products before their prices escalate. This can be illustrated using figure 3. As a result, there will be a rightward shift of AD curve from AD₁ to AD₂ which brings the output and price level up. In figure 3, the output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (f):

To determine

Effect on Aggregate Demand and Supply.

Subpart (f):

Expert Solution

Explanation of Solution

Figure 5 is used to explain this case. In figure 5, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 5

As oil prices fall (oil is an imported resource) due to the disintegration of OPEC, it increases the U.S. aggregate supply. As a result, there will be a rightward shift of AS curve from AS to AS₁. This brings the output level up from Q to Q₁ and price level down from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (g):

To determine

Effect on Aggregate Demand and Supply.

Subpart (g):

Expert Solution

Explanation of Solution

A reduction in the personal income tax rates raises take-home income increases consumer purchases at each possible price level. This is illustrated in figure 3. Tax cuts shift the aggregate demand curve to the right from AD₁ to AD₂ which brings the output and price level up. In figure 3, the output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (h):

To determine

Effect on Aggregate Demand and Supply.

Subpart (h):

Expert Solution

Explanation of Solution

The sizable increase the labor productivity with no change in nominal wages will increase the overall productivity as more output is available for the given input. This increases the aggregate supply thereby shifting the AS curve to the right from AS to AS₁ (Refer Figure 5). This leads to an increase in output (from Q to Q₁) and a decrease in price level from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (i):

To determine

Effect on Aggregate Demand and Supply.

Subpart (i):

Expert Solution

Explanation of Solution

This case can be explained using Figure 2. When there is an increase in nominal wages with no change in productivity, it increases per unit cost of production. This force the AS curve to shift left (from AS to AS₁). The equilibrium position moves from E to T, thus there are a decline in the output (from Q to Q₁) and a rise in the price level (from P to P₁).

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (j):

To determine

Effect on Aggregate Demand and Supply.

Subpart (j):

Expert Solution

Explanation of Solution

Figure 6 shows the impact of increasing demand and decreasing supply.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 6

Figure 6 is used to explain this condition. The horizontal axis in Figure 6 measures the real domestic output whereas price level is measured by the vertical axis. A rise in net exports (higher exports relative to imports) shifts the aggregate demand curve to the right (from AD₁ to AD₂). But, due to the higher input prices, per unit cost is more, leading to a shift of the aggregate supply curve to the left from AS₁ to AS₂. This leads to an increase in output from Q to Q₁ along with an increase in price level from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 12, Problem 6RQ

Subpart (a):

To determine

Effect on Aggregate Demand and Supply.

Subpart (a):

Expert Solution

Explanation of Solution

When consumers fear of an impending economic depression, their spending decline and they tend to save more. This leads to a decrease in AD curve. This can be explained by using figure 1.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 1

In figure 1, horizontal axis represents the real GDP(Gross Domestic Product) and vertical axis represents price level. In this case, the AD curve shifts left (from AD₁ to AD₂), and this moves the equilibrium position from a to c, thus there is a decline in the output (from Q_f to Q₁) and a decline in the price level (from P₁ to P₂), assuming no ratchet effect.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (b):

To determine

Effect on Aggregate Demand and Supply.

Subpart (b):

Expert Solution

Explanation of Solution

When a new tax is imposed on producers, cost of production comes up and there is no incentive to produce more. This leads to a decline in AS curve. This can be explained using figure 2.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 2

In figure 2, horizontal axis represents the real GDP and vertical axis represents price level. In this case, the AS curve shifts left (from AS to AS₁), this moves the equilibrium position from E to T, thus there is a decline in the output (from Q to Q₁) and a rise in the price level (from P to P₁).

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (c):

To determine

Effect on Aggregate Demand and Supply.

Subpart (c):

Expert Solution

Explanation of Solution

Figure 3 can explain the shift in AD curve due to reduction in interest rates at each price level. In figure 3, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 3

A reduction in interest rates decreases the borrowing cost increases the spending.

This leads to a rightward shift of AD curve from AD₁ to AD₂. Thus, it brings the output and price level up. The output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (d):

To determine

Effect on Aggregate Demand and Supply.

Subpart (d):

Expert Solution

Explanation of Solution

A major increase in spending shifts the AD curve to right. Figure 4 is used to explain this situation. In figure 4, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 4

Government expenditure is a key determinant of changes in the aggregate demand. The increase in government spending (spending for health care) increases the aggregate demand leading to a shift of AD curve from AD₁ to AD₂. Any real improvements in healthcare resulting from the spending would ultimately increase the productivity, thereby shifting the AS curve to the right (from AS₁ to AS₂). The equilibrium moves from a to c leading to an increase in output (from Q₁ to Q₃) . It will also move the price level up from P₁ to P₃.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (e):

To determine

Effect on Aggregate Demand and Supply.

Subpart (e):

Expert Solution

Explanation of Solution

The general expectation of surging inflation in the near future will increase the aggregate demand today because the consumers will want to buy products before their prices escalate. This can be illustrated using figure 3. As a result, there will be a rightward shift of AD curve from AD₁ to AD₂ which brings the output and price level up. In figure 3, the output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (f):

To determine

Effect on Aggregate Demand and Supply.

Subpart (f):

Expert Solution

Explanation of Solution

Figure 5 is used to explain this case. In figure 5, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 5

As oil prices fall (oil is an imported resource) due to the disintegration of OPEC, it increases the U.S. aggregate supply. As a result, there will be a rightward shift of AS curve from AS to AS₁. This brings the output level up from Q to Q₁ and price level down from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (g):

To determine

Effect on Aggregate Demand and Supply.

Subpart (g):

Expert Solution

Explanation of Solution

A reduction in the personal income tax rates raises take-home income increases consumer purchases at each possible price level. This is illustrated in figure 3. Tax cuts shift the aggregate demand curve to the right from AD₁ to AD₂ which brings the output and price level up. In figure 3, the output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (h):

To determine

Effect on Aggregate Demand and Supply.

Subpart (h):

Expert Solution

Explanation of Solution

The sizable increase the labor productivity with no change in nominal wages will increase the overall productivity as more output is available for the given input. This increases the aggregate supply thereby shifting the AS curve to the right from AS to AS₁ (Refer Figure 5). This leads to an increase in output (from Q to Q₁) and a decrease in price level from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (i):

To determine

Effect on Aggregate Demand and Supply.

Subpart (i):

Expert Solution

Explanation of Solution

This case can be explained using Figure 2. When there is an increase in nominal wages with no change in productivity, it increases per unit cost of production. This force the AS curve to shift left (from AS to AS₁). The equilibrium position moves from E to T, thus there are a decline in the output (from Q to Q₁) and a rise in the price level (from P to P₁).

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Subpart (j):

To determine

Effect on Aggregate Demand and Supply.

Subpart (j):

Expert Solution

Explanation of Solution

Figure 6 shows the impact of increasing demand and decreasing supply.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 6

Figure 6 is used to explain this condition. The horizontal axis in Figure 6 measures the real domestic output whereas price level is measured by the vertical axis. A rise in net exports (higher exports relative to imports) shifts the aggregate demand curve to the right (from AD₁ to AD₂). But, due to the higher input prices, per unit cost is more, leading to a shift of the aggregate supply curve to the left from AS₁ to AS₂. This leads to an increase in output from Q to Q₁ along with an increase in price level from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 6

Chapter 12, Problem 6RQ

Subpart (a):

To determine

Effect on Aggregate Demand and Supply.

Subpart (a):

Expert Solution

Explanation of Solution

When consumers fear of an impending economic depression, their spending decline and they tend to save more. This leads to a decrease in AD curve. This can be explained by using figure 1.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 1

In figure 1, horizontal axis represents the real GDP(Gross Domestic Product) and vertical axis represents price level. In this case, the AD curve shifts left (from AD₁ to AD₂), and this moves the equilibrium position from a to c, thus there is a decline in the output (from Q_f to Q₁) and a decline in the price level (from P₁ to P₂), assuming no ratchet effect.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 7

Chapter 12, Problem 6RQ

Subpart (a):

To determine

Effect on Aggregate Demand and Supply.

Answer 8

Subpart (a):

Expert Solution

Explanation of Solution

When consumers fear of an impending economic depression, their spending decline and they tend to save more. This leads to a decrease in AD curve. This can be explained by using figure 1.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 1

In figure 1, horizontal axis represents the real GDP(Gross Domestic Product) and vertical axis represents price level. In this case, the AD curve shifts left (from AD₁ to AD₂), and this moves the equilibrium position from a to c, thus there is a decline in the output (from Q_f to Q₁) and a decline in the price level (from P₁ to P₂), assuming no ratchet effect.

Answer 9

Subpart (a):

Expert Solution

Answer 10

Subpart (a):

Expert Solution

Answer 11

Expert Solution

Answer 12

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 13

Subpart (b):

To determine

Effect on Aggregate Demand and Supply.

Subpart (b):

Expert Solution

Explanation of Solution

When a new tax is imposed on producers, cost of production comes up and there is no incentive to produce more. This leads to a decline in AS curve. This can be explained using figure 2.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 2

In figure 2, horizontal axis represents the real GDP and vertical axis represents price level. In this case, the AS curve shifts left (from AS to AS₁), this moves the equilibrium position from E to T, thus there is a decline in the output (from Q to Q₁) and a rise in the price level (from P to P₁).

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 14

Subpart (b):

To determine

Effect on Aggregate Demand and Supply.

Answer 15

Subpart (b):

Expert Solution

Explanation of Solution

When a new tax is imposed on producers, cost of production comes up and there is no incentive to produce more. This leads to a decline in AS curve. This can be explained using figure 2.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 2

In figure 2, horizontal axis represents the real GDP and vertical axis represents price level. In this case, the AS curve shifts left (from AS to AS₁), this moves the equilibrium position from E to T, thus there is a decline in the output (from Q to Q₁) and a rise in the price level (from P to P₁).

Answer 16

Subpart (b):

Expert Solution

Answer 17

Subpart (b):

Expert Solution

Answer 18

Expert Solution

Answer 19

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 20

Subpart (c):

To determine

Effect on Aggregate Demand and Supply.

Subpart (c):

Expert Solution

Explanation of Solution

Figure 3 can explain the shift in AD curve due to reduction in interest rates at each price level. In figure 3, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 3

A reduction in interest rates decreases the borrowing cost increases the spending.

This leads to a rightward shift of AD curve from AD₁ to AD₂. Thus, it brings the output and price level up. The output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 21

Subpart (c):

To determine

Effect on Aggregate Demand and Supply.

Answer 22

Subpart (c):

Expert Solution

Explanation of Solution

Figure 3 can explain the shift in AD curve due to reduction in interest rates at each price level. In figure 3, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 3

A reduction in interest rates decreases the borrowing cost increases the spending.

This leads to a rightward shift of AD curve from AD₁ to AD₂. Thus, it brings the output and price level up. The output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Answer 23

Subpart (c):

Expert Solution

Answer 24

Subpart (c):

Expert Solution

Answer 25

Expert Solution

Answer 26

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 27

Subpart (d):

To determine

Effect on Aggregate Demand and Supply.

Subpart (d):

Expert Solution

Explanation of Solution

A major increase in spending shifts the AD curve to right. Figure 4 is used to explain this situation. In figure 4, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 4

Government expenditure is a key determinant of changes in the aggregate demand. The increase in government spending (spending for health care) increases the aggregate demand leading to a shift of AD curve from AD₁ to AD₂. Any real improvements in healthcare resulting from the spending would ultimately increase the productivity, thereby shifting the AS curve to the right (from AS₁ to AS₂). The equilibrium moves from a to c leading to an increase in output (from Q₁ to Q₃) . It will also move the price level up from P₁ to P₃.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 28

Subpart (d):

To determine

Effect on Aggregate Demand and Supply.

Answer 29

Subpart (d):

Expert Solution

Explanation of Solution

A major increase in spending shifts the AD curve to right. Figure 4 is used to explain this situation. In figure 4, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 4

Government expenditure is a key determinant of changes in the aggregate demand. The increase in government spending (spending for health care) increases the aggregate demand leading to a shift of AD curve from AD₁ to AD₂. Any real improvements in healthcare resulting from the spending would ultimately increase the productivity, thereby shifting the AS curve to the right (from AS₁ to AS₂). The equilibrium moves from a to c leading to an increase in output (from Q₁ to Q₃) . It will also move the price level up from P₁ to P₃.

Answer 30

Subpart (d):

Expert Solution

Answer 31

Subpart (d):

Expert Solution

Answer 32

Expert Solution

Answer 33

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 34

Subpart (e):

To determine

Effect on Aggregate Demand and Supply.

Subpart (e):

Expert Solution

Explanation of Solution

The general expectation of surging inflation in the near future will increase the aggregate demand today because the consumers will want to buy products before their prices escalate. This can be illustrated using figure 3. As a result, there will be a rightward shift of AD curve from AD₁ to AD₂ which brings the output and price level up. In figure 3, the output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 35

Subpart (e):

To determine

Effect on Aggregate Demand and Supply.

Answer 36

Subpart (e):

Expert Solution

Explanation of Solution

The general expectation of surging inflation in the near future will increase the aggregate demand today because the consumers will want to buy products before their prices escalate. This can be illustrated using figure 3. As a result, there will be a rightward shift of AD curve from AD₁ to AD₂ which brings the output and price level up. In figure 3, the output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Answer 37

Subpart (e):

Expert Solution

Answer 38

Subpart (e):

Expert Solution

Answer 39

Expert Solution

Answer 40

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 41

Subpart (f):

To determine

Effect on Aggregate Demand and Supply.

Subpart (f):

Expert Solution

Explanation of Solution

Figure 5 is used to explain this case. In figure 5, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 5

As oil prices fall (oil is an imported resource) due to the disintegration of OPEC, it increases the U.S. aggregate supply. As a result, there will be a rightward shift of AS curve from AS to AS₁. This brings the output level up from Q to Q₁ and price level down from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 42

Subpart (f):

To determine

Effect on Aggregate Demand and Supply.

Answer 43

Subpart (f):

Expert Solution

Explanation of Solution

Figure 5 is used to explain this case. In figure 5, horizontal axis measures the real GDP and vertical axis measures the price level.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 5

As oil prices fall (oil is an imported resource) due to the disintegration of OPEC, it increases the U.S. aggregate supply. As a result, there will be a rightward shift of AS curve from AS to AS₁. This brings the output level up from Q to Q₁ and price level down from P to P₁.

Answer 44

Subpart (f):

Expert Solution

Answer 45

Subpart (f):

Expert Solution

Answer 46

Expert Solution

Answer 47

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 48

Subpart (g):

To determine

Effect on Aggregate Demand and Supply.

Subpart (g):

Expert Solution

Explanation of Solution

A reduction in the personal income tax rates raises take-home income increases consumer purchases at each possible price level. This is illustrated in figure 3. Tax cuts shift the aggregate demand curve to the right from AD₁ to AD₂ which brings the output and price level up. In figure 3, the output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 49

Subpart (g):

To determine

Effect on Aggregate Demand and Supply.

Answer 50

Subpart (g):

Expert Solution

Explanation of Solution

A reduction in the personal income tax rates raises take-home income increases consumer purchases at each possible price level. This is illustrated in figure 3. Tax cuts shift the aggregate demand curve to the right from AD₁ to AD₂ which brings the output and price level up. In figure 3, the output increases from Q₁ to Q₂ and price level increases from P₁ to P₂.

Answer 51

Subpart (g):

Expert Solution

Answer 52

Subpart (g):

Expert Solution

Answer 53

Expert Solution

Answer 54

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 55

Subpart (h):

To determine

Effect on Aggregate Demand and Supply.

Subpart (h):

Expert Solution

Explanation of Solution

The sizable increase the labor productivity with no change in nominal wages will increase the overall productivity as more output is available for the given input. This increases the aggregate supply thereby shifting the AS curve to the right from AS to AS₁ (Refer Figure 5). This leads to an increase in output (from Q to Q₁) and a decrease in price level from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 56

Subpart (h):

To determine

Effect on Aggregate Demand and Supply.

Answer 57

Subpart (h):

Expert Solution

Explanation of Solution

The sizable increase the labor productivity with no change in nominal wages will increase the overall productivity as more output is available for the given input. This increases the aggregate supply thereby shifting the AS curve to the right from AS to AS₁ (Refer Figure 5). This leads to an increase in output (from Q to Q₁) and a decrease in price level from P to P₁.

Answer 58

Subpart (h):

Expert Solution

Answer 59

Subpart (h):

Expert Solution

Answer 60

Expert Solution

Answer 61

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 62

Subpart (i):

To determine

Effect on Aggregate Demand and Supply.

Subpart (i):

Expert Solution

Explanation of Solution

This case can be explained using Figure 2. When there is an increase in nominal wages with no change in productivity, it increases per unit cost of production. This force the AS curve to shift left (from AS to AS₁). The equilibrium position moves from E to T, thus there are a decline in the output (from Q to Q₁) and a rise in the price level (from P to P₁).

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 63

Subpart (i):

To determine

Effect on Aggregate Demand and Supply.

Answer 64

Subpart (i):

Expert Solution

Explanation of Solution

This case can be explained using Figure 2. When there is an increase in nominal wages with no change in productivity, it increases per unit cost of production. This force the AS curve to shift left (from AS to AS₁). The equilibrium position moves from E to T, thus there are a decline in the output (from Q to Q₁) and a rise in the price level (from P to P₁).

Answer 65

Subpart (i):

Expert Solution

Answer 66

Subpart (i):

Expert Solution

Answer 67

Expert Solution

Answer 68

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 69

Subpart (j):

To determine

Effect on Aggregate Demand and Supply.

Subpart (j):

Expert Solution

Explanation of Solution

Figure 6 shows the impact of increasing demand and decreasing supply.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 6

Figure 6 is used to explain this condition. The horizontal axis in Figure 6 measures the real domestic output whereas price level is measured by the vertical axis. A rise in net exports (higher exports relative to imports) shifts the aggregate demand curve to the right (from AD₁ to AD₂). But, due to the higher input prices, per unit cost is more, leading to a shift of the aggregate supply curve to the left from AS₁ to AS₂. This leads to an increase in output from Q to Q₁ along with an increase in price level from P to P₁.

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.

Answer 70

Subpart (j):

To determine

Effect on Aggregate Demand and Supply.

Answer 71

Subpart (j):

Expert Solution

Explanation of Solution

Figure 6 shows the impact of increasing demand and decreasing supply.

MACROECONOMICS (LL), Chapter 12, Problem 6RQ , additional homework tip 6

Figure 6 is used to explain this condition. The horizontal axis in Figure 6 measures the real domestic output whereas price level is measured by the vertical axis. A rise in net exports (higher exports relative to imports) shifts the aggregate demand curve to the right (from AD₁ to AD₂). But, due to the higher input prices, per unit cost is more, leading to a shift of the aggregate supply curve to the left from AS₁ to AS₂. This leads to an increase in output from Q to Q₁ along with an increase in price level from P to P₁.

Answer 72

Subpart (j):

Expert Solution

Answer 73

Subpart (j):

Expert Solution

Answer 74

Expert Solution

Answer 75

Economics Concept Introduction

Concept Introduction:

Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.

Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.