EP ECONOMICS,AP EDITION-CONNECT ACCESS
20th Edition
ISBN: 9780021403455
Author: McConnell
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
Chapter 31, Problem 2P
To determine
Demand - pull inflation or cost - pull inflation.
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Suppose the public expects a 7 percent inflation rate, while the Federal Reserve unexpectedly allows the
money growth rate to be 4 percent. In the short run, we expect that investment spending by firms will
and consumer durable spending will
000
decrease; decrease
increase; increase
decrease; increase
increase; decrease
Suppose an economist believes that the price level in the economy is directly related to the money supply, or the amount of money circulating in the economy. The economist proposes the following relationship:
P=A×MP=A×M
•
P=Price LevelP=Price Level
•
M=Money SupplyM=Money Supply
•
A=A composite of other factors, including real GDP, that change very slowly over time.A=A composite of other factors, including real GDP, that change very slowly over time.
How might an economist gather empirical data to test the proposed relationship between money and the price level?
The graph shows an aggregate demand curve.
Draw a curve that shows the effect on aggregate demand
of an increase in the expected future inflation rate. Label
it.
140-
130-
120-
110-
100-
90-
Price level (GDP deflator, 2009=100)
AD
99
80+
11.0 11.5 12.0 12.5 13.0 13.5 14.0 14.5 15.0
Real GDP (trillions of 2009 dollars)
Chapter 31 Solutions
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- The following table describes the aggregate demand curve, where real GDP is expressed as the percent deviation from potential GDP and inflation is expressed as a percentage: Real GDP 2.0 1.0 0.0 -1.0 -2.0 Inflation 19 3.0 4.0 5.0 7.0 9.0 Due to a price shock, inflation increases by 2%. In the long run, what will real GDP be (expressed as the percent deviation from potential GDP)?arrow_forwardFor this problem, you will analyze the following component of GDP: ... O ...consumption [variant 1]... O ...investment [variant 2]... O ...net exports [variant 3]... ...measured in real terms. a) Describe in detail how inflation affects this component of GDP. What is the name of the effect through which this component is affected by inflation? b) The aggregate-demand curve shifted to the left. Suggest two possible events related to this GDP component that could have contributed to this shift. c) Suggest a policy the government can introduce or eliminate to stimulate aggregate demand through this GDP component. d) On the graph below [excluded]: Label the axes. ● Graph the aggregate-demand curve, the long-run aggregate-supply curve, and the short-run aggregate-supply curve. Make sure you label them. Graph the shift of the aggregate-demand curve to the left and label the new curve. Show what will happen if the government introduces the policy you suggested in part (c). Assume the policy…arrow_forwardWhy do some economists support some level of inflation over completely stable prices? Instructions: You may select more than one answer. Click the box with a check mark for correct answers and click to empty the box for the wrong answers. ? Reduced risk of deflation ? Easier for firms to adjust real wages ? More opportunity for contractionary fiscal policy ? More difficult for firms to adjust real wages ? More opportunity for expansionary monetary policyarrow_forward
- The graph below depicts an economy where an increase in aggregate demand has caused inflation. Assume the government decides to conduct fiscal policy by changing taxes to bring inflation under control. Price Level 180 160 140 120 100 80 60 40 0 Fiscal Policy LRAS AD AS Real GDP (billions of dollars) AD₁ 100 200 300 400 500 600 700 800 Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? $ (300) ► billion b. If the MPC is 0.667, how much do taxes need to change to shift aggregate demand by the amount you found in part a? $ billion Suppose instead that the MPC is 0.75. c. How much does aggregate demand and taxes need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ (300) billion and taxes need to change by $ 100 billion.arrow_forwardThe adjacent diagram (Graph 1) shows the initial aggregate credit demand curve (CD₁) of the economy. Suppose the economy is currently at point A. Identify how the economy is likely to shift/move due to changes in credit demand in the following cases. Scenario Actions of the newly elected head of state make citizens feel pessimistic about the future. The government increases its spending on infrastructure by financing it through borrowing Banks raise the nominal interest rate by 2 percentage points after inflation rises by 4 percentage points. New position of economy The solar energy industry in country Z is relative are only a handful of small-scale producers curr energy industry (which offers a substitute for sol many large-scale producers currently in the mar government of country Z's ratification, the govern and production of solar energy D E B gnificant barriers to entry, and there arket. On the other hand, the coal been long-established and has the recent Paris agreement and the…arrow_forwardThe following graph shows the aggregate demand (AD₁) and aggregate supply (AS) curves for a hypothetical economy with full-employment output of $11 trillion. PRICE LEVEL (CPI) 130 AS 125 120 115 110 AD1 105 100 95 90 90 8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 12.0 REAL GDP (Trillions of dollars) AD2 Macro Eq 2 ? Suppose the level of real GDP supplied by firms is $9 trillion and the price level is 100. In this case, the quantity of real GDP supplied is the real GDP demanded at a price level of 100, and firms will experience an unplanned in inventories. Firms will respond to the change in inventories by producing output until the economy reaches macroeconomic equilibrium at a price level of and real GDP of Suppose consumers and businesses become more optimistic about future economic conditions, causing the aggregate demand curve to increase by $1.5 trillion at each price level. Use the green line (triangle symbols) to show the new aggregate demand curve (AD 2). Be sure that AD2 is parallel…arrow_forward
- Using the graph, illustrate the long-run impact of the increase in government spending by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve in the appropriate directions PRICE LEVEL 240 200 2 200 400 600 800 OUTPUT (Bions of dollars) AS 1000 1200 þ 2þ 2 In the long run, due to the increase in government spending, the price level natural level of output, and the unemployment rate ? the natural rate. the quantity of gotputarrow_forwardDistinguish between demand-pull inflation and cost-push inflation. Which of the two types is most likely to be associated with a negative GDP gap? Which with a positive GDP gap, in which actual GDP exceeds potential GDP?arrow_forwardDirections: Read the following excerpts. Identify whether the policy action is fiscal or monetary and expansionary or contractionary. Draw and label the change that would occur on the ADAS graph as a result of the policy action described in each. Identify what will happen as a result of the policy to the price level, employment, and real GDP. Excerpt from Public Law 111-5 of the 111th Congress: Signed into law by President Obama February 17, 2009 “Making supplemental appropriations for job preservation and creation, infrastructure investment, energy efficiency and science, assistance to the unemployed, and State and local fiscal stabilization. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled. TITLE XII—Transportation, Housing and Urban Development, and Related Agencies …projects eligible for funding provided under this heading shall include, but not be limited to, highway or bridge projects eligible under title 23, United…arrow_forward
- In 2013, Prussia's aggregate demand curve was determined by the equation M + 0 = 4%. A change in aggregate demand means that in 2014, Prussia's aggregate demand curve was determined by the equation M + U = 7%. Using this information, draw Prussia's old and new dynamic aggregate demand curves on the graph. Inflation rate 14 13 12 11 10 9 8 7 4 3 2 1 0 -4 -3 2-1 0 1 2 3 4 5 Real GDP growth rate AD 2013 AD 2014 6 7 8 9 10 Which of the factors could have resulted in the change in aggregate demand seen between 2013 and 2014? higher consumer confidence an improvement in technology O a decrease in oil prices an increase in importsarrow_forward8. Economic fluctuations I The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion. Suppose the government increases spending on building and repairing highways, bridges, and ports. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the increase in government spending. AS 160 X AD 200 400 600 800 OUTPUT (Billions of dollars) PRICE LEVEL 240 200 40 0 0 1000 1200 8 2 4 2 ? In the short run, the increase in government spending on infrastructure causes the price level to the quantity of output to the natural rate of unemployment in the short run. the price level people expected and the natural level of output. The increase in government spending will cause the unemployment rate toarrow_forwardRead the following excerpts. Identify whether the policy action is fiscal or monetary and expansionary or contractionary. Draw and label the change that would occur on the ADAS graph as a result of the policy action described in each. Identify what will happen as a result of the policy to the price level, employment, and real GDP. Excerpt from Public Law 103-66 of the 103rd Congress: Signed into law by President Clinton August 10, 1993 “To provide for reconciliation pursuant to section 7 of the concurrent resolution on the budget for fiscal year 1994. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled. Title XIII: Revenue, Health Care, Human Resources, Income Security, Customs and Trade, Food Stamp Program, and Timber Sale Provisions …Subchapter B: Revenue Increases - Increases the marginal tax rate for certain higher incomes. Imposes a surtax on certain higher incomes. Sec. 13203 Increases the tentative minimum tax for…arrow_forward
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