Exploring Economics
8th Edition
ISBN: 9781544336329
Author: Robert L. Sexton
Publisher: SAGE Publications, Inc
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Chapter 22, Problem 2P
To determine
(a)
To fill:
The blanks in the given sentences.
To determine
(b)
To fill:
The blanks in the given statement.
To determine
(c)
To fill:
The blanks in the given statement.
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An economist needs to predict the real wage rate, employment, output, real interest rate, consumption, investment, and price level. The economy is hit with a shock, which the economist thinks is a temporary adverse supply shock.
(a) If you were the economist, what would be your forecasts for each of the variables listed above (rise, fall, and no change) in general equilibrium?
(b) What if the shock was due to people's reduced expectations about their future income? Which variables did you forecast correctly, and which did you forecast incorrectly in part (a)?
Figure 1: Hayek’s (Classical) AD-AS Model
Economics Online. (n.d.). Aggregate Demand. Retrieved from http://economicsonline.co.uk/Managing_the_economy/Aggregate_demand.html
Hayek says that markets will heal themselves and that government should not intervene. How does the AD-AS model reflect Hayek’s idea that governments cannot increase real GDP beyond the level that the free market economy is able to produce?
Do you believe that the Hayek’s classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not?
Figure 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?
2.2. In macroeconomics, the immediate short run is known as a length…
The following equations describe a small economy. Figures are in millions of dollars; interest rate (i) is in percent per annum. Assume that the price level (P) is fixed.
Goods Market
C = Co + cYD (Private consumption)
YD = Y + TR – T (Disposable income)
T = To + tY (Total taxes)
I = Io – bi (Private investment)
G = Go, TR = TRo (Gov. Expenditure and Transfers, respectively)
Y = C + I + G (Goods mkt. equilibrium condition)
Money Market
L = kY- hi (Demand for real balances)
Ms = Mo/P (Real money supply)
L = Ms (Money mkt. equilibrium condition)
Endogenous Variables: C, YD T, I, Y, L, Ms and i
Exogenous Variables: Co = 300, To = 80, Io = 450, Go = 300, TRo = 100, Mo = 350, P =1
Parameters: c = 0.85, t = 0.15, b = 50, k = 0.25 and h = 62.5
Policy…
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Similar questions
- Does Says law apply more accurately in the long run or the short run? What about Keynes law?arrow_forwardThe short run aggregate supply curve was constructed assuming that as the price of outputs increases, the puce of inputs stays the same. How would an increase in the prices of important inputs, like energy, affect aggregate supply?arrow_forwardUsing the model of business fluctuations, show the effect of the COVID-19. Recall that COVID-19 shut down production in a series of important U.S. industries and caused considerable job losses. Fear of the virus caused Americans to travel less, buy fewer personal services, and consume fewer restaurant meals. (b) The Fed responded to the economic effects of COVID-19 by cutting interest rates while Congress passed a large relief package (i.e., an increase in government spending). Show each of these effects on a separate diagram.arrow_forward
- On a diagram, demonstrate the effects of (a) a fall in investment and (b) a fall in the money supply. What does the size of the fall in national income depend on?arrow_forwardThe aggregate demand curve shows the relationship between the volume of purchases and the price level. The aggregate demand curve is downward sloping because, ceteris paribus people are willing and able to buy more goods and services at lower average prices. Which of the following is a reason for the downward slope of the aggregate demand curve? A- The real balances effect B- The interest rate effect C- The foreign trade effect D- All of the abovearrow_forwardAccording to Keynes, when the price level rises, it causes the interest rate to do what? It causes the level of business spending to do what? a. It causes a decrease in the interest rate, as people adjust to higher prices and purchase less; business spending decreases as well. b. It causes a decrease in the interest rate, as people adjust to higher prices and purchase less; business spending goes up. c. It causes an increase in the interest rate, due to greater consumer demand for money to spend; business spending goes up as well. d. It causes an increase in the interest rate, due to a greater consumer demand for money to spend; business spending decreases.arrow_forward
- !! YOU WILL NEED TO CREATE GRAPHS !! answer the second part**As we have discussed in class, there was a collapse in housing markets and financial markets in 2008. On the graph, we see a decrease in actual real GDP in 2009. Use an AS/AD model to show how the economy got to the situation displayed in the graph in 2009. (Start with your graph from 2007, the shift the appropriate curve and show the new SR equilibrium in 2009.) **In 2009, The United States Federal government passed legislation to increase goverment spending and cut taxes. At the same time, the Federal Reserve Bank took actions to lower interest rates and increase the money supply. What does this do to the AS/AD model from the question above? Show which curve shifts after these policies and the way the curve shifts. Show the resulting SR equilibrium in 2016. How does the SR equilibrium compare to the LRAS curve?**arrow_forwardOther things the same, the aggregate quantity of goods demanded decreases if a. real wealth falls. b. the interest rate rises. c. the dollar appreciates. d. All of the above are correct.arrow_forwardA4 Imagine that in the year 2035, Japan’s economy shrinks significantly, causing a decrease in investment in the U.S. economy. Use the ADAS model to explain the likely short run impacts on U.S. GDP and the aggregate price level. What do you anticipate to happen to U.S. consumption expenditures and U.S. employment? Explain your reasoning for each of your predictions and show graphically as appropriate. Students may utilize Paint, Word (the shapes tool under Insert), OneNote (Draw tab), or hand draw the graphs.arrow_forward
- Analyzing Macroeconomic Events with the IS-MP Diagram. Consider the following events in the macroeconomy. Show how to think about them using the IS-MP diagram. For each, explain how and why GDP in the United States is affected in the short run and show how the central bank should respond if it wishes to stabilize output. (a) The government offers a temporary investment tax credit: for each dollar of investment that firms undertake, they get a credit that reduces the taxes they pay on corporate income. (b) A housing bubble bursts, so that housing prices fall by 20% and new home sales drop sharply. (c) A resurgence of growth in Japan leads to an unexpected increase in the demand by Japanese consumers for U.S. goods.arrow_forwardmagine an economy in which nominal GDP grew between 2018 and 2019 and real GDP fell during that same time period. Which of the following answers might explain this? Question 30 options: A) both prices and national output increased between 2018 and 2019 B) both prices and national output fell between 2018 and 2019 C) prices in the economy increased while national output fell between 2018 and 2019 D) prices in the economy fell while national output increased between 2018 and 2019arrow_forwardthe economy is self-regulating and in a recessionary gap, what happens? a. Wages rise, the SRAS curve shifts leftward, and both Real GDP and the price level rise. b. Wages fall, the SRAS curve shifts leftward, the price level rises, and Real GDP falls. c. Wages fall, the SRAS curve shifts rightward, and both the price level and Real GDP fall. d. Wages fall, the SRAS curve shifts rightward, the price level falls, and Real GDP rises. e. none of the abovearrow_forward
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