Principles of Macroeconomics
6th Edition
ISBN: 9780073518992
Author: Robert H. Frank, Ben Bernanke Professor, Kate Antonovics, Ori Heffetz
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 13, Problem 7P
(a)
To determine
Determine the changes in the aggregate
(b)
To determine
Graphically illustrate the economy’s short-run equilibrium.
(c)
To determine
Determine the impact of adverse inflation shock in the economy.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
In Figure 1 above,how does the AD-AS model reflect the idea that governments cannot increase real GDP beyond an economy’s equilibrium level that the free-market economy is able to produce? Explain your answer.
2.1. In Figure 2 above, what are the factors that may cause the aggregate demand to shift from AD to AD1? What is the difference between demand pull inflation, cost push inflation, and recession? 2.2. Define and describe:
the aggregate supply (AS) curve in the immediate short run.
the aggregate supply (AS) curve in the short run.
the aggregate supply (AS) in the long run.
3. Listen: Podcast: The Economics of Fiscal Stimulus - Econ EveryDay
The Covid-19 pandemic shifted the aggregate supply and aggregate demand curves to the left.
Did that increase or decrease real GDP, employment, and inflation rate?
Explain your answer.
Explain what is meant by aggregate demand. Then how to derive the AD curve and why the AD curve has a negative slope. Explain using a graph how the effect of an increase in money supply on the AD curve. In the same way, also explain the effect of an increase in government purchase on the AD curve.
Aggregate Demand and Aggregate Supply - End of
Chapter Problems
10. There were two major shocks to the U.S. economy in
2007, leading to the severe recession of 2007-2009. One
shock was related to oil prices; the other was the slump in
the housing market. In the accompanying graph, shift the
AD and/or SRAS curves and move the equilibrium point to
its new position to show the effects of the following two
shocks on GDP in the AD-AS framework.
a. Data taken from the Department of Energy indicate that
the average price of crude oil in the world increased from
$54.63 per barrel on Jan. 5, 2007, to $92.93 on Dec. 28,
2007.
b. The Housing Price Index, published by the Office of
Federal Housing Enterprise Oversight, calculates that U.S.
home prices fell by an average of 3% in the 12 months
between January 2007 and January 2008.
c. As a result of the two shocks, real GDP
decreased
price level
increased
, whereas the aggregate
Aggregate price level
Incorrect
E
[1]
Real GDP
SRAS
AD
Chapter 13 Solutions
Principles of Macroeconomics
Knowledge Booster
Similar questions
- Draw an AD-SRAS diagram, where the economy is initially at equilibrium and input prices do not move as quickly as output prices. Imagine a shock hits the economy, and after the shock you see in the data that the inflation rate has decreased in the economy while output has increased. What could have caused the shock? An increase in government spending. An increase in the capital stock An increase in inflation expectations An increase in importsarrow_forwardFigure 2: Keynes’s AD-AS Model Economics Online. (n.d.). Aggregate supply. Retrieved from http://www.economicsonline.co.uk/Managing_the_economy/Aggregate+supply.html 2.1. In Figure 2 above, what are the factors that may cause the aggregate demand to shift from AD to AD1? What is the difference between demand pull inflation, cost push inflation and recession?arrow_forwardIn an AD-AS model, one can distinguish between two broad types of macroeconomic policy measures, namely demand-side and supply-side measures. Use the AD-AS model above to explain and illustrate, from a theoretical perspective, that by choosing the right combination of measures (policies) it is possible for the economy to grow without it experiencing inflationary pressures. Which policy combination is critical in ensuring that the price level does not increase?arrow_forward
- Draw the AD/AS graph for the situation being described Explain one monetary policy action to correct the economy back to the natural rate Explain one fiscal policy action to correct the economy back to the natural rate Draw how the policy will impact the AD/AS model from part 1. 4. There has been a huge run in the prices of commodities especially oil in the past years. This run in prices has occurred with more and more people losing their jobs. The unemployment rate stands at 12% with inflation matching it at 14%. The people are now feeling the Misery Index of 26%. How will the government help them?arrow_forwardFor Shock I: Suppose the economy starts in the long run equilibrium. Illustrate changes that the shock will cause in the short run (using AD-SRAS). Explain why each curve shifts. Determine how the price level and output will be affected in the short run. Mark the output gap on the diagram. Is the output gap positive or negative? Is the economy is booming, or is it in a recession? On the same diagram illustrate how the economy will adjust to the shock in the long run and explain the mechanism. Determine how the price level and output will be affected in the long run. I. A pandemic causes households to stay home all the time; as a result, they reduce their consumption As a result of this shock, in the short run the (SRAS Curve/AD Curve) will shift? In consequence, in the short run prices and output will? In the short run, there will be a ? (negative/postive) output gap,which means there will be a ? (boom/recession) As time passes, because of high unemployment the wages in the…arrow_forwardExplain with the aid of a diagram An increase in the price of oil is an example of a negative supply shock. Use the AD-AS model graph to explain the effect of a negative supply shock on the price levels and output levels in the economy.arrow_forward
- Describe an economic environment which would be characterized by the term "stagflation". Using an AD - AS diagram, depict and given an example of a macroeconomic shock that would take an economy from a long - run equilibrium to a situation of stagflation. Label all points on the graph completely and point out the key characteristics associated with stagflation on your graph.arrow_forwardGive an example of a favourable and unfavourable shock to the aggregate supply. Use the model of aggregate demand (AD) and aggregate supply (AS) to explain the effects of such shocks. How do these shocks affect the AD-AS curves?arrow_forwardSuppose the economy begins in a short-run recessionary equilibrium. As price expectations and wages adjust and the economy moves from the short-run equilibrium to the new long-run equilibrium, a- consumer spending increases as prices fall and the AD curve shifts to the left b- consumer spending increases as prices fall and the AD curve shifts to the right c- consumer spending increases as prices fall generating a movement along the AD curve d- government spending rises as shown by a movement along the AD curvearrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
Economics: Private and Public Choice (MindTap Cou...EconomicsISBN:9781305506725Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning
Economics: Private and Public Choice (MindTap Cou...
Economics
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning