MindTap Economics, 1 Term (6 Months) Printed Access Card for Mceachern's ECON MACRO, 6th
6th Edition
ISBN: 9781337915595
Author: William A. McEachern
Publisher: Cengage Learning
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Question
Chapter 16, Problem 3P
To determine
The short-run effects of increased money supply correctly anticipated by the people on prices, output, and employment
Concept Introduction:
Rational Expectations: Decisions made by individual agents based on the best information available and based on the past trends.
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The writing assignment requires applying your knowledge of how shifts in aggregate demand (AD) and aggregate supply (AS) affect the economy. Relevant knowledge is important because shifts in AD and AS affect all aspects of an economy, including output and unemployment.
Using aggregate demand and aggregate supply, explain what happens in the short run if the Federal Reserve raises interest rates in the economy? Assume that the economy is at full employment before the interest rate increase. Be sure to detail what happens to:
aggregate demand
the price level
the level of GDP
and unemployment.
Consider the figure to the right. What change in the position of the aggregate demand curve could
generate deflation that is, a decrease in the equilibrium price level? What type of variation in the
quantity of money placed into circulation by the Bank of Canada could generate such a change in the
position of the aggregate demand (AD) curve?
A fall in the equilibrium price level could be caused by
Canada could generate such a change in the position of the aggregate demand (AD) curve by
the quantity of money placed into circulation.
in aggregate demand. The Bank of
1.) Using the line drawing tool, draw a new AD curve that shows the effects of decreasing the quantity of
money in circulation. Label your line "AD2."
2.) Using the point drawing tool, indicate the economy's new long-run equilibrium price and level of real
GDP. Label this point "E₂.
Carefully follow the instructions above, and draw only the required objects.
Price Level
LRAS₁
E₁
Real GDP per Year ($ trillions)
AD₁
What is an impact of a temporary money expansion on the aggregate demand (AD) curve?
The AD curve shifts upward. The AD curve shifts downward. The AD curve does not shift
and the equilibrium point moves upward along the AD curve. The AD curve does not shift
and the equilibrium point moves downward along the AD curve
Chapter 16 Solutions
MindTap Economics, 1 Term (6 Months) Printed Access Card for Mceachern's ECON MACRO, 6th
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- If money supply rises, will the price level rise by the same percentage? It all depends on what happens to V and Y. The effects will tend to differ in the short run from the long run. Delete the wrong words in the following statements: (a) In the short run, V can change substantially / is unlikely to change much at all when money supply changes. (b) In the short run, a rise in MV (i.e. a rise in aggregate demand) will lead to a rise in the price level / may or may not lead to a rise in the price level depending on the degree of slack in the economy.arrow_forwardBelow is a graphical model of the AS-AD. In this model, the initial level of the economy is at low output and low inflation. Describe what happens to the economy when the BSP decides to lower interest rate and most likely this will lead to an increase in money supply thereafter. Answer the following guide questions. Based on the graph. What happens to the aggregate demand? Describe your answer.arrow_forwardSuppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. The inflation rate C The price level C The level of technological knowledge The size of the labor force Suppose the economy produces real GDP of $70 billion when unemployment is at its natural rate. Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph. 132 128 LRAS 124 120 116 112 108 104 100 10 20 30 40 50 60 70 80 OUTPUT (Billions of dollars) Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to which will: O Shift the long-run aggregate supply curve to the right O Shift the long-run aggregate supply curve to the left O Not affect the long-run aggregate supply curve PRICE LEVELarrow_forward
- Suppose velocity rises and the money supply falls. How will things change in the AD–AS framework if a change in the money supply is completely offset by a change in velocity? Check all that apply. The increase in velocity could shift the AD curve to the left by the same amount as the fall in the money supply shifts the AD curve to the right. Changes in the money supply would have no effect on Real GDP, the short-run price level, nor the long-run price level. A change in the money supply would decrease Real GDP, the short-run price level, and the long-run price level. The increase in velocity could shift the AD curve to the right by the same amount as the fall in the money supply shifts the AD curve to the left.arrow_forwardSuppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. The quantity of physical capital The size of the labor force The level of technological knowledge The inflation rate Suppose the economy produces real GDP of $60 billion when unemployment is at its natural rate. Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph. Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to (Rise/fall), which will: Not affect the long-run aggregate supply curve Shift the long-run aggregate supply curve to the right Shift the long-run aggregate supply curve to the left In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve…arrow_forwardThe graph shows the long-run aggregate supply (LRAS), short-run aggregate supply (SRAS), and aggregate demand (AD) curves for a given economy. Manipulate the curves to show the short-run effect of an increase in money supply. Look at images to solve for thisarrow_forward
- Suppose velocity rises and the money supply falls: How will things change in the AD-AS framework if a change in the money supply is completely offset by a change in velocity? The fall in velocity could shift the AD curve to the right by the same amount as the increase in the money supply shifts the AD curve to the left. The increase in velocity could shift the AD curve to the right by the same amount as the fall in the money supply shifts the AD curve to the left. A change in the money supply would decrease Real GDP, the short-run price level, and the long-run price level. The fall in velocity would shift the AD curve to the left by the same amount as the increase in the money supply shifts the AD curve to the right.arrow_forwardShow and explain why aggregate demand (AD) curve is negatively sloped by taking the link between the goods market and money market into considerationarrow_forwardSuppose an economy is hit by natural disaster and its natural resources decreases. Show graphically using AD-AS model how the price level and output are affected in the short-run. Can the government use monetary policy to offset the effects on both price level and output simultaneously, explain?arrow_forward
- In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift Many workers leave to pursue more lucrative careers in foreign economies. A scientific breakthrough significantly increases food production per acre of farmland. A natural disaster destroys a significant amount of the economy's production facilities.arrow_forward3) Oil prices have risen quite a bit in the last four months. Use the AD-AS model (along with a labor market graph) to show and explain how this will affect Y, N, W/P, and P over time. Does the increase in oil prices make the Fed’s job easier or harder? Explain. Finally, there has been a boom in oil and natural gas exploration and development over the last decade. Show and explain how this may impact Y, N, W/P, and P over time.arrow_forwardThe economy of Winterspring is currently in an equilibrium depicted by point E, on the graph. Economy of Winterspring Now suppose that there is a demand shock in the economy and the AD curve shifts from AD, to AD,, as shown by the graph. 2400- 2.200- AS Suppose that there is no monetary validation. 2.000- 1.800- Using the point drawing tool, show the short-run equilibrium that the economy will move into in this case. Label this point E,. A 1,600- 1400 Carclully follow the instructions above, and only draw the required objects. 1.200 900 600 AD 3,000 5,000 7.c00 9.c00 Real GDP (Y) 1,000 11,000 Price Level (P)arrow_forward
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