Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
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Textbook Question
Chapter 24, Problem 53CTQ
The AD/AS model is static. It shows a snapshot of the economy at a given point in time. Both
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True/ false .
The purchasing power and inflation have an inverse relationship.
Suppose you are Herb Stein, Chair of Economic Advisors to President Ford. OPEC has just quadrupled the price of oil. The entire economy uses oil in manufacturing (exaggeration, but not a big one), consequently the costs reflected by the AS curve dramatically increase. Using the AD/AS model, what happens to output and prices? Same role, a recession with inflation now exists(stagflation), both are serious, 10% u/e, 14% inflation. You are thinking of proposing a solution to the recession, the negative GDP gap is $300 billion, the MPC is .75. Businesses won't increase Investment because of fear of losses You remember from your econ 101 class, that there is a multiplier effect for Government Expenditures. If you just want to fix this negative gap, how much Government expenditure would you propose? Same role, Using the AD/AS model, what would you expect to be the result of your proposal in the above question, with regard to output, and inflation? Does the degree of the shape of the AD/AS…
A stable inflation rate is necessary to forecast business activities and make better investment decisions. *
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Chapter 24 Solutions
Principles of Economics 2e
Ch. 24 - Describe the mechanism by which supply creates its...Ch. 24 - Describe the mechanism by which demand creates its...Ch. 24 - The short run aggregate supply curve was...Ch. 24 - In the AD/AS model, what prevents the economy from...Ch. 24 - Suppose the U.S. Congress passes significant...Ch. 24 - Suppose concerns about the size of the federal...Ch. 24 - How would a dramatic increase in the value of the...Ch. 24 - Suppose Mexico, one of our largest trading...Ch. 24 - A policymaker claims that tax cuts led the economy...Ch. 24 - Many financial analysts and economists eagerly...
Ch. 24 - What impact would a decrease in the size of the...Ch. 24 - Suppose, after five years of sluggish growth, the...Ch. 24 - Suppose the Federal Reserve begins to Increase the...Ch. 24 - If the economy is operating in the neoclassical...Ch. 24 - If the economy is operating In the Keynesian zone...Ch. 24 - What is says law?Ch. 24 - What is Keynes; law?Ch. 24 - Do neoclassical economists believe in Keynes law...Ch. 24 - Does Says law apply more accurately in the long...Ch. 24 - What is on the horizontal axis of the AD/AS...Ch. 24 - What is the economic reason why the SRAS curve...Ch. 24 - What are the components of the aggregate demand...Ch. 24 - What are the economic reasons why the AD curve...Ch. 24 - Briefly explain the reason for the near-horizontal...Ch. 24 - Briefly explain the reason for the near-vertical...Ch. 24 - What is potential GDP?Ch. 24 - Name some factors that could cause the SRAS curve...Ch. 24 - Will the shift of SRAS to the right tend to make...Ch. 24 - What is stagflation?Ch. 24 - Name some factors that could cause AD to shift,...Ch. 24 - Would a shift of AD to the right tend to make the...Ch. 24 - How is long-term growth illustrated in an AD/AS...Ch. 24 - How is recession illustrated in an AD/AS model?Ch. 24 - How is cyclical unemployment illustrated in an...Ch. 24 - How is the natural rate of unemployment...Ch. 24 - How is pressure for inflationary price increases...Ch. 24 - What are some of the ways in which exports and...Ch. 24 - What is the Keynesian zone of the SRAS curve? How...Ch. 24 - What is the neoclassical zone of the SRAS curve?...Ch. 24 - What is the intermediate zone of the SRAS curve?...Ch. 24 - Why would an economist choose either the...Ch. 24 - On a microeconomic demand curve, a decrease in...Ch. 24 - Economists expect that as the labor market...Ch. 24 - If new government regulations require firms to use...Ch. 24 - During spring 2016 the Midwestern United States,...Ch. 24 - Hydraulic fracturing (tracking) has the potential...Ch. 24 - Some politicians have suggested tying the minimum...Ch. 24 - If households decide to save a larger portion of...Ch. 24 - If firms become more optimistic about the future...Ch. 24 - If Congress cuts taxes at the same time that...Ch. 24 - Suppose the level of structural unemployment...Ch. 24 - If foreign wealth-holders decide that the United...Ch. 24 - The AD/AS model is static. It shows a snapshot of...Ch. 24 - Explain why the short-run aggregate supply curve...Ch. 24 - Explain why the short-run aggregate supply curve...Ch. 24 - Why might it be important for policymakers to know...Ch. 24 - In your view, is the economy currently operating...Ch. 24 - Are Says law and Keynes law necessarily mutually...Ch. 24 - Review the problem in the Work It Out titled...Ch. 24 - The imaginary country of Harris Island has the...Ch. 24 - Table 24.4 describes Santhers economy. Plot the...
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Similar questions
- The country of Freeland has an aggregate demand curve determined by the equation M+v=6% Freeland also has a potential growth rate of 2%. Using this information, draw Freeland's aggregate demand (AD) and long-run aggregate supply (LRAS) curves on the graph. Inflation rate (%) 12 11 10 9 8 7 6 5 3 2 4 LRAS ADarrow_forwardExplain why a supply shocks is most of the time believed to be temporary? And does not result in government requiring to do any special policy to rectify the problem.arrow_forwardInflation is increasingly becoming a concern among economists. One of the heads of Bank of America has predicted that consumer prices will increase by 8% by the end of 2021. Using the AD/SRAS/LRAS graph show how inflation will effect the AD curve. (Start the graph at the macroequilibrium point and show the changes)arrow_forward
- What is the main measure used to track inflation in most countries? a) Gross Domestic Product (GDP) b) Consumer Price Index (CPI) c) Producer Price Index (PPI) d) Unemployment Rate When the rate of inflation exceeds the rate of interest, what is the likely effect on savers? a) Real interest rates increase b) Real interest rates decreasearrow_forwardSuppose in 2020 the US economy was in a short run equilibrium below full employment, such that GDP was $19 trillion and the GDP price Index was 240. Recent policy in the form of government spending increases and tax decreases will increase aggregate spending. Depict this in the AD-AS framework. How will the unemployment rate compare to the natural rate of unemployment?arrow_forwardConsider a standard AD-AS model. If the SRAS curve is steep, a temporary tax cut leads to a relatively small increase in inflation and relatively large decrease in unemployment.Answer true, false, or uncertain. Please briefly explain your answer.arrow_forward
- The AD/AS model can help us understand that inflation can be caused by: decreases in SRAS or increases in AD. decreases in SRAS or decreases in AD. increases in LRAS higher potential GDParrow_forwardWhy is inflation a macroeconomic problem? Why can't an inflation rate of 0% be achieved?arrow_forwardIn the Keynesian framework, which of the following events might cause inflation? Group of answer choices interest rates rise none of the above exports decrease a large increase in the price of the homes people own.arrow_forward
- Consider an economy that targets an inflation rate of 2 percent. After reviewing economic changes, the government changes the target rate to 3 percent. As a result, the MPRC will Group of answer choices get steeper shift leftward get flatter shift rightwardarrow_forwardAggregate demand function is given by Y=7000-20P; the short-run aggregate supply function is given by Y=6000+5(P-Pe). The economy was in equilibrium when the government unexpectedly increased its spending which led to a shift of the aggregate demand curve to Y=7500-20P. What's the rate of inflation? Please illustrate the calculations by means of an AS-AD graph.arrow_forwardPhilip's Curve and AD-AS Model: Use assumptions below to set up an initial point denoted as the point A for a and b. For each of the following draw an AD/AS diagram and a corresponding Philip's curve assuming the following: 1) Natural unemployment is 5% 2) Unemployment is 4% 3) Actual GDP is 20,000 4) Full employment GDP is 10,000 a)show in both diagrams the effect of a surprise increase in inflation. b)Show in both diagrams the effect of Friedman and the Natural rate Theory(Hint:using monetary policy in the short run, but self-correction in the long run) c) Show in both diagrams the effects of a decrease in income tax on price level, output,unemployment and inflation.(Hint: Fiscal Policy) d)show in both diagrams the effect of a decrease in expected inflation.arrow_forward
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