**15. Distinguish between demand-pull inflation and cost-push inflation. Which of the two types is most likely to be associated with a (negative) GDP gap? Which with a positive GDP gap, in which actual GDP exceeds potential GDP?**Demand-pull inflation occurs when prices rise because of an increase in aggregate spending not fully matched by an increase in aggregate output. It is sometimes expressed as “too much spending (or money) chasing too few goods.”Cost-push inflation describes prices rising because of increases in per unit costs of production.Cost-push inflation is most likely to be associated with a negative GDP gap, as the rising production costs reduce spending and output.Demand-pull inflation is more likely to occur with a positive GDP gap, because actual GDP will exceed its potential only when aggregate spending is strong and rising. As the economy produces above its potential, bottlenecks and more severe resource scarcity occur, driving up prices.

The difference between cost-push and demand-pull inflation is that for cost-push inflation, costs…

Answered: 15. Distinguish between demand-pull…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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4. Now assume we advocate a Keynesian narrative of the economy. Furthermore, prices and wage rates are sticky downwards. This time, due to the pandemic, firms cut their demand in the labor market and in the goods market, the economy suffers from a severe recession. Show the effects on both markets in two separate graphs and explain given the stated assumptions, what would be the change in GDP, price level, inflation, unemployment, and wage rate?
6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy deviates from the expected price level. Several theories explain how this might happen. For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 90. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will v , and firms that rely on catalogs will respond by v the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected…
The table below shows the initial aggregate demand, short-run, and long-run aggregate supply schedules - Price level Aggregate demand (billion $) Aggregate Supply (billion $) Long run Aggregate supply (billion $) 80 1600 400 800 90 1400 600 800 100 1200 800 800 110 1000 1000 800 120 800 1200 800 130 600 1400 800 140 400 1600 800 h. Is there positive or negative cyclical unemployment ? i. Do you have to Increase or decrease GDP? j. Should the country implement expansionary or contractionary policy?
22. When the aggregate demand curve and the short-run aggregate supply curve intersect, A) the long-run aggregate supply curve must also intersect at the same point. B) inflation must be increasing. C) structural and frictional unemployment equal zero. D) the economy is in short-run macroeconomic equilibrium. 23. Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run? A) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise. B) Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise. C) Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall. D) Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall.
5. The stock market crash has caused a great number of asset prices to drop sharply.If people’s expectation on current inflation level remain unchanged, what wouldbe the effects of this crisis to inflation and unemployment? Explain and useappropriate diagrams to support your answer.
Consider the figure to the right. If this country's government decides to increase its short-term spending, what happens to the short-run equilibrium price level, and why? Is this an example of demand-pull or cost-push inflation? Explain. 1.) Using the line drawing tool, draw either a new aggregate demand (AD) curve or a new short-run aggregate supply (AS) curve that shows the effects of temporary government spending increases. Properly label your line. 2.) Using the point drawing tool, indicate the economy's new short-run equilibrium price and level of real GDP. Label this point 'E₂.' Carefully follow the instructions above, and only draw the required objects. Price Level LRAS₁ Real GDP per Year (S trillions) AS₁ AD₁
6. Aggregate demand, aggregate supply, and the Phillips curve In the year 2023, aggregate demand and aggregate supply in the fictional country of Bartak are represented by the curves AD2023 and AS on the following graph. The price level is 102. The graph also shows two possible outcomes for 2024. The first potential aggregate demand curve is given by the ADA curve, resulting in the outcome illustrated by point A. The second potential aggregate demand curve is given by the ADB curve, resulting in the outcome illustrated by point B. 108 107 AS 106 B 105 A 104 AD 2023 103 AD. 102 AD 101 100 2 4 6 8 10 12 14 16 OUTPUT (Trillions of dollars) Suppose the unemployment rate is 7% under one of these two outcomes and 5% under the other. Based on the previous graph, you would expect to be associated with the higher unemployment rate (7%). If aggregate demand is low in 2024, and the economy is at outcome A, the inflation rate between 2023 and 2024 is PRICE LEVEL
8. In the economy, we found a recessionary gap of 50, relative to potential output of 4,800. Suppose that, in this economy, the natural rate of unemployment rate is 5%. What will the actual unemployment rate be after the recessionary gap appears?"
4. Suppose that the President and Congress get legislation passed that encourages investment in research and development of new technologies. Assuming this policy results in a positive and permanent technological change, what does aggregate demand and supply analysis predict in terms of inflation and output? Only consider the self- correcting mechanism of the economy.
5. a) State whether the following are true or false and explain why. Frictional and structural unemployment are two words for the same thing. i. ii. If an economy is at full employment, the unemployment rate is zero. b) The AD (Aggregate Demand) curve shows the relationship between general price levels and real GDP. i. State and briefly explain the components of aggregate demand (AD). ii. State four factors that would cause • A fall in aggregate demand • An increase in aggregate demand c) i. What is the accelerator effect Explain the difference between the accelerator and the multiplier. Given that Country X has a nominal GDP of $100,000 and its real GDP is 11. 111.
5. Suppose an economy is hit by a flood and its natural resources decreases. a) Show graphically using AD-AS model how the price level and output are affected in the short-run. b) Can the government use monetary policy to offset the effects on price level and output, explain?
9-)Suppose that government decides to support the firms for their investments in research and the development.Assuming this support increases productivity in the economy, use aggregate demand and supply analysis to predict the short-run and long-run effects on inflation and output. Show these effects on a graph and explain the results in detail. IMPORTANT NOTE FOR THE QUESTION: DESCRIPTION ≠ EXPLANATION; So please DO NOT just write like “this curve shifts right or left etc.” as an explanation (I can see it on the graph), EXPLAIN “WHY” that curve shifts right or left and clearly write “WHAT” are the short-run and the long-run RESULTS of the shift(s) on inflation and output.)

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