Problem
I. Describe the likely effect of the following events would on the aggregate demand (AD) curve.
i. A boost in research and development by computer companies produces more powerful and efficient computers and equipment.
ii. Income falls in several countries that trade heavily with the U.S.
iii. Prices level fall across several industries.
iv. After a budget surplus, Congress moves to cut personal income taxes.
II. Suppose that a hypothetical economy has the following relationship between its real domestic output and the input quantities necessary for producing that level of output.
Input quantity
Real domestic output
400
800
300
600
100
200
i. What is the level of productivity in this economy?
ii. What is the unit cost of production if the price of each input is $2.00?
iii. If the input price decreases from $2 to $1.50, what is the new per unit cost of production? In what direction would the aggregate supply curve shift? What effect would this shift have on the price level and the level of real domestic output if the economy is initially operating at AD1 & AS1 curves?
III. With the help of the diagrams, evaluate the effect of the following on the AD curve, AS curve, equilibrium price level and equilibrium output.
i. The U.S. imposes tariffs on foreign goods to promote domestic industry. In retaliation, foreign countries impose tariffs on U.S. goods.
ii. Congress decides to decrease personal income taxes, and to compensate for the lost revenue they decrease business subsidies.
iii. A technology boom improves technology across industries, improving their productivity.
iv. U.S. oil companies discover new large oil reserves in the U.S. The international price of oil falls.