Economics (Irwin Economics)
21st Edition
ISBN: 9781259723223
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 38, Problem 4DQ
To determine
Some similarities in the two cases: the distinctions between short run aggregate supply and long run aggregate supply and the distinction between the short run Phillips Curve and the long run Phillips Curve.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
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?
15. Suppose that the relationship between inflation rate (π) and unemployment rate (u) is described by the following equation:
πt – πte = (m + z) – αut
where m = 0.05, z = 0.04, and α = 2. In this economy, the authorities keep unemployment rate at 4% forever.
a. If the modified Philips curve describes the relationship between π and u correctly, how should “πte” be specified? Rewrite the equation using this specification. Assume that πt–1 = 1%. Compute πt, πt+1, and πt+2.
b. Do you believe the answer in part (a)? Why or why not?
c. Derive the natural rate of unemployment.
4. Suppose that people expect inflation to equal 3 percent, but in fact prices rise by 5 percent. Indicate whether this unexpected higher rate of inflation would help or hurt each of the following groups.
a homeowner with a fixed-rate mortgage.
a union worker with a fixed labor contract
a company that has invested some of its endowment in a government bonds which pay a fixed rate of return.
5. Indicate how each of the following events would affect the aggregate demand AD curve:
a short-run decrease in the price level
an increase in consumer confidence on the price level and real GDP
an increase in government purchases
Chapter 38 Solutions
Economics (Irwin Economics)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Similar questions
- 3) Suppose that a fall in consumer spending causes a recession a)Illustrate the immediate changes in the economy using both an aggregate-supply/aggregate-demand diagram and a Phillips-curve diagram.On both graphs, label the initial long-run equilibrium as point A and the resulting short-run equilibrium as point B.What happens to inflation and unemployment in the short-run b)Now suppose that over time expected inflation changes in the same direction that actual inflation changes.What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation-unemployment combinations? Explain.arrow_forward1.Now suppose that the increase in investment spending was entirely anticipated by firms and workers. This means the public fully anticipates the rightward shift of the aggregate demand curve (from AD1AD1 to AD2AD2). According to rational-expectations adherents, the anticipated change in aggregate demand will cause the economy to move in which direction? A.Directly from point N to point Z B.From point N to point K, before returning to point N C.From point N to point D, before returning to point N D.From point N to point D and, eventually, from point D to point Z 2.Suppose next year, the Fed once again announces that its monetary policy is aimed at maintaining price stability at the level reached last year (the price level you found in the previous question) and output at potential output ($8 trillion). However, because the government reneged on its promise last year, workers and firms suspect that the Fed will again shift to an expansionary policy. As a result,…arrow_forward24. Which of the following groups benefit from an unanticipated rise in the inflation rate ? O. homeowners with foxed - rate mortgages O. elderly people living on fixed incomes O. creditors or lenders O. workers on contracts without escalator claines 25. Suppose oil prices continue to rise , causing a supply shock . If the Fed increases interest rates , what would be the long run outcome ? O. The economy returns to long run equilibrium at a lower output but higher price level O. The economy returns to long run equilibrium at the original price level and output O. The economy returns to full employment but at a higher price level O. The economy returns to the original price level but at a lower outputarrow_forward
- 42. Suppose that there is a temporary fall in aggregate supply due to a drought. Whathappens in the long-run?(A) Higher prices cause permanent tensions, leading long-run aggregate supply to shiftleft, resulting in a lower natural rate of output.(B) Over time, as the drought conditions fade, aggregate supply rises and returns tothe original natural rate of output.(C) Aggregate demand shifts right, so that prices are higher but long-run output isunchanged.(D) If the person you’re dating enjoys Taylor Swift, dump them immediatelyarrow_forward4. Consider the ASAD model of a closed economy with zero ongoing inflation and workers misperceptions. Firms are perfectly competitive, produce output with diminishing marginal returns to labour and have perfect foresight over the price level. Workers, instead, expect zero inflation in each period. At time zero, the economy is in the potential equilibrium. There is a negative shock on aggregate demand – for example, a permanent fall in desired autonomous consumption at time t = 1. What are the effects of the shock on the equilibrium real wage in the short and in the medium run? Describe (at least in words, and even better in a diagram) the entire time path of the real wage from before the shock to the medium-run equilibrium. Prove your statements formally – for example, use the diagram of the labour market where you measure the real wage on the vertical axis, and distinguish the very short run (the temporary equilibrium at time t = 1) from the medium run. Carefully explain the…arrow_forward5. Suppose that this year’s money supply is $500 billion, nominal GDP is $10 trillion, and real GDP is $5 trillion. D.) What money supply should the Fed set next year if it wants to keep the price level stable? E.) What money supply should the Fed set next year if it wants an inflation rate of 10%.arrow_forward
- 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. a. If household wealth falls by 5 percent because of declining house values, and the real interest rate falls by 3 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level?arrow_forward28. Start at full-employment (FE) equilibrium with flexible wages and worker misperception of price level changes in the short run. Suppose then that we have an increase in Aggregate Demand. What are the short-run effects on price level (P), output level (Q), wage level (W), employment (L), and unemployment (U)? Group of answer choices a) P increases, Q increases, W decreases, L decreases, U increases b) P decreases, Q increases, W increases, L decreases, U increases c) P increases, Q increases, W increases, L increases, U decreases d) P increases, Q increases, W decreases, L increases, U increases e) P increases, Q decreases, W increases, L increases, U decreasesarrow_forward2. Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility. Assume that in 2020, both countries are hit with the same COVID-19 shock.If the both central banks announce an autonomous easing policy to reduce the unemployment rate, a) How does the credibility of each country’s central bank affect the speed of adjustment of the aggregate supply curve to policy announcements? b) How does this result affect output stability? (Use aggregate supply and demand diagrams to demonstrate)arrow_forward
- 81.Assume that in a certain economy the LM curve is given by Y = 2,000r – 2,000 + 2(M/P), and the IS curve is given by Y = 8,000 – 2,000r + u, where u is a shock that is equal to +200 half the time and –200 half the time. The price level (P) is fixed at 1.0. The natural rate of output is 4,000. The government wants to keep output as close as possible to 4,000 and does not care about anything else. Consider the following two policy rules: i. Set the money supply M equal to 1,000 and keep it there. ii. Manipulate M from day to day to keep the interest rate constant at 2 percent. a.Under rule i, what will Y be when u = +200? What will Y be under rule i when u = –200? b.Under rule ii, what will Y be when u = +200? What will Y be under rule ii, when u = –200? c.Which rule will keep output closer to 4,000? 82.Assume that in a certain economy the LM curve is given by Y = 2,000r – 2,000 + 2(M/P) + u, where u is a shock that is equal to +200 half the…arrow_forwardSuppose that a fall in consumer spending causes a recession. a. Illustrate the changes in the economy using both an aggregate supply/aggregate demand diagram and a Phillips curve diagram. What happens to inflation and unemployment in the short run? (5%) b. Now suppose that over time, expected inflation changes in the same direction that actual inflation changes. What happens to the position of the short-run Phillips curve? After the recession is over, does the economy face a better or worse set of inflation– unemployment combinations? (5%)arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Principles of Macroeconomics (MindTap Course List)EconomicsISBN:9781285165912Author:N. Gregory MankiwPublisher:Cengage Learning
Principles of Economics, 7th Edition (MindTap Cou...EconomicsISBN:9781285165875Author:N. Gregory MankiwPublisher:Cengage Learning
Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours...EconomicsISBN:9781337091985Author:N. Gregory MankiwPublisher:Cengage Learning
Principles of Macroeconomics (MindTap Course List)EconomicsISBN:9781305971509Author:N. Gregory MankiwPublisher:Cengage Learning
Principles of Macroeconomics (MindTap Course List)
Economics
ISBN:9781285165912
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Principles of Economics, 7th Edition (MindTap Cou...
Economics
ISBN:9781285165875
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours...
Economics
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Principles of Macroeconomics (MindTap Course List)
Economics
ISBN:9781305971509
Author:N. Gregory Mankiw
Publisher:Cengage Learning