Supply and demand questions as well as some definitions:
Identifications:
Give a definition and explain the significance of the following 6 terms:
Law of Demand; Phillips Curve; frictional unemployment; deadweight loss; open market operations; managed exchange rates, real gdp, aggregate price level
Hot dogs:
Using a supply-demand graph, predict the effect on the price and quanity of hot dogs of the following two events:
1. Many taco restaurants open in the area.
2. A sales tax is imposed on hot dogs.
3. The price of mustard rises
1. The price of “ketchup” rises
2. The local price of hamburgers falls
Assume that the mustard/ketchup as to be offered as part of the hotdog/hamburger
Note: make sure you have explained the reasons for your demand and/or supply curve shifts.
Tax incidence:
If a tax is imposed on the price of a particular product, the burden of the tax in general falls on the consumers and the producers. Suppose the product in question has a very price-“inelastic” demand as compared with the price elasticity of supply. If a sales tax is imposed on this product, which side (suppliers or demanders) will wind up paying the bulk of the tax? Explain, using words and a supply-demand graph.
Aggregate demand and supply:
Draw an aggregate demand (AD) and aggregate supply (AS) graph showing the determination of P and Y. Explain carefully what P and Y are (that is, define them carefully). Note: it is very important to be careful in defining these terms. We have been over this issue many times.
Using a Keynesian Cross diagram (C+I+G+X-M against Y with the 45 degree line), illustrate the effect of a monetary policy that lowers the interest rate.. Keep assuming that P is constant. Show geometrically why the effect on Y is greater than the shift in G. Again: you need to be careful on this. This is something that has been asked before.
Now assume that prices are not constant and that the aggregate supply curve (AS) is upward sloping. What will the effect be on the multiplier effects you dealt with in question 5? Explain carefully.
Multipliers:
Changes in aggregate expenditure can ignite ‘multiplier” effects on income and output. Suppose the marginal propensity to consume in question 5 above is equal to .75. How much then would the multiplier effect of a $ 1 billion increase in government expenditure (G) turn out to be? Explain.
Monetary policy:
Because of recent “unconventional monetary policies” some now fear that the Fed will lose its independence in making monetary policy decisions.
Explain and evaluate this.
Phillips curve
What is the argument that the Phillips Curve is “vertical in the long run?” Write the answer and explain.
Exchange rates
In the foreign exchange market, what is actually being traded for what? (What is meant by trading “currency” for another “currency?”) Explain.
Basic AD and AS:
Why does the aggregate demand (AD) fall if the aggregate price deflator (P) rises? How is the argument different from the case of the demand curve for “widgets” or hot dogs? Explain.