Assignment:
Aggregate Demand
Explain the intuition behind the wealth, interest rate, and exchange rate effects
Multipliers
Households in Iron Island save 10% of every additional dollar in income that they receive. What will happen to aggregate demand Maggietopia if there is a $4 billion increase in lump-sum taxes?
Note: Please answer this question on your own.
Short-run Aggregate Supply (SRAS)
Describe why there is a short-run relationship between the unemployment rate and ination. Can you think of a reason why this might not hold up in the long run?
What causes SRAS to shift? [Explain]
Why is SRAS curve upward sloping? [Explain]
Describe sticky wage theory to someone who has never heard of it before. How would you describe it?
1. What are the reasons that the aggregate supply curve is vertical in the long-run but not in the short-run?
2. If an economy is producing its potential output, is the current rate of unemployment less than, greater than, or equal to the natural rate of unemployment? Explain.
Equilibrium in the AD-AS model
1. What is the difference between a short-run equilibrium and a long-run equilibrium?
2. Assume the economy of Johnsrudia is currently operating at short-run equilibrium and producing $300 million in real GDP and a CPI of 190. However, the full employment rate of output in Johnsrudia is $350 million. Draw a correctly labeled graph of the AD-AS model that reflects this information Changes in the AD-AS model in the short run.
Shifts in Aggregate Demand
1. How would a dramatic increase in the value of the stock market shift the AD curve? What effect would the shift have on the equilibrium level of GDP and the price level?
2. Suppose Mexico, one of our largest trading partners and purchaser of a large quantity of our exports, goes into a recession. Use the AD/AS model to determine the likely impact on our equilibrium GDP and price level.
3. A policymaker claims that tax cuts led the economy out of a recession. Can we use the AD/AS diagram to show this?
4. Many financial analysts and economists eagerly await reports on the home price index and consumer confidence index. What would be the effects of negative reports on both of these? What about positive reports?
5. Name some factors that could cause AD to shift, and explain whether they would shift AD to the right or to the left.
6. Would a shift of AD to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of AD to the left?
7. If households decided to save a larger portion of their income, what effect would this have on the output, employment, and price level in the short run? What about the long run?
8. If firms became more optimistic about the future of the economy and, at the same time, innovation in 3-D printing made most workers more productive, what would the combined effect on output, employment, and the price-level be?
9. If the US Congress cut taxes at the same time that businesses became more pessimistic about the economy, what would the combined effect on output, the price level, and employment be, based on the AD/AS diagram?
Shifts in Short-run Aggregate Supply
1. Suppose the US Congress passes significant immigration reform that makes it easier for foreigners to come to the United States to work. Use the AD/AS model to explain how this would affect the equilibrium level of GDP and the price level.
2. Suppose concerns about the size of the federal budget deficit lead the US Congress to cut all funding for research and development for 10 years. Assuming this has an impact on technology growth, what does the AD/AS model predict would be the likely effect on equilibrium GDP and the price level?
3. Name some factors that could cause the SRAS curve to shift, and explain whether they would shift SRAS to the right or to the left.
4. Will the shift of SRAS to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of SRAS to the left?
5. What is stagflation?
Summary
In a previous lesson it was stated that there is a negative relationship between unemployment and inflation in the short run. A shock to one of our curves is consistent with this idea, but a shock to the other curve is not actually consistent with a negative relationship between unemployment and inflation. What kind of shift is consistent with this relationship, and which is not?
During the 1970s, the United States was hit with an oil embargo which dramatically increased the price of energy. Explain how this would impact output, ination, and the unemployment rate.
Long-run self adjustment in the AD-AS model
1. The economy of Johnsrudia is experiencing a positive output gap caused by an increase in consumption. Describe the chain of events that would lead the economy to return to producing its full employment output.
2. What might prevent the self-correction mechanism from occurring?
3. During the 2008 recession in the United States, a decrease in consumption and investment spending lead to a decrease in aggregate demand. Describe the chain of events that would lead the economy to return to a long-run equilibrium.