Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Question
Chapter 9, Problem 15CQ
(a)
To determine
Describe the quantity of
(b)
To determine
Explain the situation is the long-run equilibrium level of GDP or not.
(c)
To determine
Explain the relationship between the actual and natural rate of
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Students have asked these similar questions
From 1/1/2020 to 7/1/2020, real GDP decreased but the GDP deflator stayed approximately the same (thus, treat it as the same number at the beginning of this period as it was at the end of this period). According to our aggregate supply/demand analysis, which of the following must have occurred over this time frame? (Use the graph to help you see if you can determine any shift(s).)
Group of answer choices
a) increase in Aggregate Demand, decrease in Aggregate Supply
b) decrease in Aggregate Demand, decrease in Aggregate Supply
c) increase in Aggregate Demand, increase in Aggregate Supply
d) increase in Aggregate Demand, but no way to determine the direction of shift in Aggregate Supply
e) decrease in Aggregate Demand, increase in Aggregate Supply
Interpret the change you drew on the previous graph by filling in the blanks in the following paragraph:
The higher-than-expected price level causes firms to earn_____profit than they expected on each unit of output they produce, and, therefore, they_____their production level. At the same time, the real value of wages and other resource prices is_____than workers and firms expected when they signed long-term contracts. As a result, the economy as a whole produces at a level______its full-employment output, and the unemployment rate is_____than its natural rate.
Now, suppose prices remain higher than expected. As a result, in the next round of labor negotiations, unions demand and obtain higher wages for their members. The following graph shows the long-run aggregate supply curve (LRASLRAS) at full-employment output for this economy as well as the same initial short-run aggregate supply curve as in the first graph. Shift one or both of these lines to illustrate how the economy…
Using a macroeconomics demand/supply analysis, where do you think current output is relative to what the economy is capable of producing? Look at recent trends in the data.
What are the recent trends in the components of aggregate demand (consumption spending, investment spending, government purchases, and exports and imports?
Chapter 9 Solutions
Economics: Private and Public Choice (MindTap Course List)
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- Suppose the level of structural unemployment increases. How would you illustrate the increase in structural unemployment in the AD/AS model? Hint: How does structural unemployment affect potential GDP?arrow_forwardBased on the articles “Unemployment Claims Remain Historically High” and “US Consumer Spending Rose More Slowly in July” from the August 27, 2020 and August 28, 2020 issues of the wall Street Journal, respectively, please respond to the following questions: a. What do you think caused the substantial reversal in consumer spending after the dramatic drop during March and April of 2020? Illustrate graphically how would that have affected the consumption schedule. b. What seems to be possible reasons why consumer spending has slowed down in July and August? Are these factors consistent with some of the non-income determinants of consumption discussed in the text? If so, which ones? c. Investment spending also fell dramatically during the second quarter of 2020. What shifters in the investment demand curve seem to be important here? d. Given your answer to part c, explain and illustrate graphically using the investment demand curve diagram why a Federal Reserve policy of lower interest…arrow_forwardUse an aggregate demand and supply diagram to illustrate and explain how each of the following will affect the equilibrium price level and the real GDP. Describe and analyze the new situation (inflationary gap, recessionary gap, stagflation). How should the situation be rectified in order to return to full employment? • Workers expect high future inflation and negotiate higher prices now • Technological improvement increase productivityarrow_forward
- Use an aggregate demand and supply diagram to illustrate and explain how each of the following will affect the equilibrium price level and the real GDP. Describe and analyze the new situation (inflationary gap, recessionary gap, stagflation). How should the situation be rectified in order to return to full employment?• Consumers expect a recession• Foreign income rises• Foreign price levels fall• Government spending increases• Workers expect high future inflation and negotiate higher prices now• Technological improvement increase productivityQUESTION: How should the situation be rectified in order to return to full employment?arrow_forwardWhat is the new GDP in the short-run as a result of this shift? What is the new price level in the short-run as a result of this shift? What is the price level in the new long-run equilibrium as a result of this shift? What is GDP in the new long-run equilibrium as a result of the shift?arrow_forwardBy using aggregate supply and demand curves to illustrate your points, discuss the impacts of the following events on the price level and on equilibrium GDP (Y) in the short run: a. A tax cut holding government purchases constant with the economy operating at near full capacity b. An increase in the money supply during a period of high unemployment and excess industrial capacity c. An increase in the price of oil caused by a war in the Middle East, assuming that the Central Bank attempts to keep interest rates constant by accommodating inflation d. An increase in taxes and a cut in government spending supported by a cooperative Fed acting to keep output from fallingarrow_forward
- The country of Merryville has an unemployment rate that is greater than the natural rate of unemployment. Using a correctly labeled graph of aggregate demand and aggregate supply, show the current equilibrium real gross domestic product, labeled YC, and price level in Merryville, labeled PLC. The president of Merryville is receiving advice from an economic adviser who advises the president to decrease personal income taxes. How would such a decrease in taxes affect aggregate demand? Explain. The government of Merryville increases spending on goods and services by $200 billion, which is financed by borrowing. If the marginal propensity to consume in Merryville is 0.75: Calculate the multiplier What is the maximum possible change in real gross domestic product (GDP) that could result from the $200 billion increase in government spending?arrow_forwardEconomists forecast future economic conditions by studying variables that tend to fluctuate in advance of the overall economy. The most significant of these variables are known as leading indicators, and they compose the index of leading economic indicators. Which of the following variables are measured as part of this index? Check all that apply. Supplier deliveries The ratio of elderly to nonelderly workers New orders for consumer goods Stock prices The money supply True or False: Businesses and government care only about long-run economic forecasts, because they cannot adapt policy or output to accommodate short-run fluctuations. False True Suppose the most recent data show that the average initial weekly claims for unemployment insurance have recently decreased. This change suggests ____ period in the coming months.arrow_forwardA number of macroeconomic variables decline during recessions. One of these variables is the GDP. What other variables, besides real GDP, tend to decline during recessions? Given the definition of real GDP and its components, explain the declines in these economic variables which are to be expected. Empirical studies indicate that the long-run trend in real GDP of the USA has an upward trend. How is this possible given business cycles and macroeconomic fluctuations? What factors explain the upward trend in spite of the cycles?arrow_forward
- Economic On April 27, 2023, the U.S. Bureau of Economic Analysis (BEA) released the data on GDP growth for the US economy for the first quarter of 2023 and revealed that the economy grew sluggishly by only 1.1 percent. Based on this report, suppose the U.S. consumers and businesses start to become pessimistic about the direction of the economy and eventually cut consumer and business spending, analyze using the IS-LM and AD-AS frameworks the short and long-run effects of such a shock on prices, output, and real interest rate.arrow_forwardUse an aggregate demand and supply diagram to illustrate and explain how each of the following will affect the equilibrium price level and the real GDP. Describe and analyze the new situation (inflationary gap, recessionary gap, stagflation). How should the situation be rectified in order to return to full employment? • Consumers expect a recession • Foreign income rises • Foreign price levels fall • Government spending increases • Workers expect high future inflation and negotiate higher prices now • Technological improvement increase productivityarrow_forwardUsing aggregate demand and aggregate supply, graph the effects on the price level and GDP of each of the following. Draw a large graph and label all axes, initial and final equilibrium points, direction of shift if any, all curves and lines, equilibrium values on the x- and y-axes. State the conclusion in words. a. A cut in income taxes b. An increase in military spending c. A drop in export demand by foreign purchasers d. An increase in imports e. A decline in business investment spendingarrow_forward
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