EP ECONOMICS,AP EDITION-CONNECT ACCESS
20th Edition
ISBN: 9780021403455
Author: McConnell
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 24, Problem 11DQ
To determine
Great recession.
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Which one of the following economic policies would not be effective in combating a recession?
O a. Increase wages to stimulate aggregate demand and depress the rate of unemployment.
O b. Expand the money supply and increase fiscal spending to stimulate aggregate demand.
O c. Expand the money supply to stimulate aggregate demand and reduce the rate of unemployment.
O d. Decrease wages to increase the quantity of labor demanded and to reduce unemployment.
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..
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Question 31
When an economy is overheated, what "automatic stabilizer" might cure things?
O a. nothing changes with "G," it's only the LRAS that moves to the right.
O b. net G increases (spending on benefits going up and tax revenues going down), pushing the aggregate demand curve upward also, or to the right.
O c. net G goes down (spending on benefits going down and and tax revenues go up), pushing down (or to the left) the aggregate demand curve.
O d. no, economies cannot be "overheated"--that is just a classical point of view. Modern economists understand growth is unlimited.
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Chapter 24 Solutions
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- 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?arrow_forwardSuppose that the table presented below shows an economy's relationship between real output and the inputs needed to produce that output: Input Quantity Real GDP 150.0 $ 400 112.5 300 75.0 200 Instructions: Enter your responses answers rounded to 2 decimal places. a. What is the level of productivity in this economy? b. What is the per-unit cost of production if the price of each input unit is $2? $ C. Assume that the input price increases from $2 to $3 with no accompanying change in productivity. What is the new per-unit cost of production? In what direction would the $1 increase in input price push the economy's aggregate supply curve? (Click to select) v What effect would this shift of aggregate supply have on the price level and the level of real output? O The price level would decrease and real output would increase. O Both the price level and real output would remain the same. O The price level would decrease and real output would remain the same. O The price level would increase…arrow_forwardSuppose that the investment demand curve in a certain economy is such that investment declines by $110 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $190 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment. If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out? Instructions: Enter your answer as a whole number. billion %24arrow_forward
- 2. L Give Up! Suppose the Japanese economy has been experiencing slow growth. As a result, the Prime Minister, who thinks John Maynard Keynes was the greatest economist ever, has decided to increase government spending. The Prime Minister asks the head of the economic council to determine the increase in government spending necessary to bring the economy to full employment. Assume there is a GDP gap of 1 trillion yen and the marginal propensity to consume (MPC) is 0.60. What advice should the head of the economic council give the Prime Minister? O The recessionary gap is equal to 400 billion yen. O The inflationary gap is equal to 400 billion yen. O The recessionary gap is equal to 625 billion yen. O The inflationary gap is equal to 625 billion yen.arrow_forwardYou are hired by the Council of Economic Advisors (CEA) as an economic consultant.The chairperson of the CEA tells you that she believes the current unemployment rate istoo high. The unemployment rate can be reduced if aggregate output increases. She wantsto know what policy to pursue to increase aggregate output by 300 billion TL. The bestestimate she has for the MPC is 0.8. Which of the following policies should yourecommend?a) Increase government purchases by 75 billion TL.b) Reduce taxes by 75 billion TL.c) Reduce taxes by 75 billion TL and to increase government purchases by 75 billion TL.d) Reduce the budget deficit by 300 billion TLarrow_forwardSuppose that the investment demand curve in a certain economy is such that investment declines by $110 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $170 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment. If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out? Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
- Discuss the following statements: a. The Keynesian multiplier is higher the higher is the degree of openness of the economy'. b. 'There is no easy policy answer when it comes to dealing with a negative supply shock'. Consider the following economy. The production function is F(K,L) = K0.3 Lº.7. The saving rate and the depreciation rate are respectively: s = 0.10 and 8 = 0.07. Population growth is 1%, i.e. n = 0.01. c. Derive the capital accumulation equation for this economy. d. Find the steady state value of the capital stock per capita. e. Suppose that the initial capital stock per capita is: k = 1.5. Discuss the process of convergence of the economy to the steady state using the appropriate diagram. f. Calculate the optimal saving rate of the economy and discuss whether the economy at the steady state over or under-accumulates capital.arrow_forwardSuppose the economy is producing below the natural rate of output and the government is suffering from large budget deficits. To deal with the deficit problem, suppose the government takes a policy action to reduce the size of the deficits. This policy action will cause in the unemployment rate in the short run and in inflation in the short run, everything else held constant. O an increase; an increase O a decrease; a decrease O a decrease; an increase O an increase; a decreasearrow_forwardHow do fluctuations in aggregate demand and short-run aggregate supply bring fluctuations in real GDP around potential GDP? Starting from a full-employment equilibrium, a decrease in aggregate demand and creates gap. O A. increases real GDP above potential GDP; an inflationary OB. decreases real GDP below potential GDP; an inflationary OC. increases real GDP above potential; a recessionary O D. decreases real GDP below potential GDP; a recessionary _, short-run aggregate , and the economy returns to a full-employment In the long run, the money wage rate supply equilibrium. O A. rises; increases B. falls; decreases C. rises; decreases D. falls; increasesarrow_forward
- Suppose the government increases the size of its deficit by increasing government spending. This will Select one: O a. increase aggregate demand and decrease short-run aggregate supply. O b. increase aggregate demand and aggregate supply. Oc increase aggregate supply and have no effect on aggregate demand. Od. increase aggregate demand and have no effect on the short-run aggregate supply curve. Oe. decrease aggregate demand and aggregate supply.arrow_forwardFor a sloping Aggregate Demand curve which of the following arguments is unconvincing? Select one: O a. None of these O b. A rise in the price level in a country will lead to lower real spending because it wil lead to lower real wealth. O C. A rise in the price level in a country will tend to lead to a fall in the real value of exports and a rise in the real value of imports. O d. A rise in the price level in a country will reduce the real value of firms' profits, causing them to reduce planned investment. O e. A rise in the price level in a country will lead to lower real spending because it will lead to a higher interest rate.arrow_forwardAn economy has a recessionary gap. With no change in aggregate demand, how does the economy return to full employment? O A. The money wage rate rises, real GDP increases, and the price level falls. O B. The money wage rate falls, real GDP increases, and the price level rises. O C. The money wage rate falls, aggregate supply increases, and the price level falls. O D. The money wage rate rises, real GDP decreases, and the price level rises. -to ooloct vour answer.arrow_forward
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