5. The effects of monetary policy with perfect inflation forecasting Suppose that workers and firms perfectly forecast inflation, so that the real wage remains unchanged as the price level rises over time. Prices and wages rise at the same rate, which implies that the real wage stays constant. The following graph shows the aggregate demand curve (AD) in an economy in long-run equilibrium. Assume the natural rate of unemployment is 6%, and potential output is $60 trillion. Use the orange points (square symbol) to draw the aggregate supply curve in this case, and use the black point (plus symbol) to mark the equilibrium price level and real GDP.

5. The effects of monetary policy with perfect inflation forecasting Suppose that workers and firms perfectly forecast inflation, so that the real wage remains unchanged as the price level rises over time. Prices and wages rise at the same rate, which implies that the real wage stays constant. The following graph shows the aggregate demand curve (AD) in an economy in long-run equilibrium. Assume the natural rate of unemployment is 6%, and potential output is $60 trillion. Use the orange points (square symbol) to draw the aggregate supply curve in this case, and use the black point (plus symbol) to mark the equilibrium price level and real GDP.

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. 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.
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39 Which of the following will cause a shift in the short-run aggregate supply curve? a.An increase in government spending b.A change in expected inflation c.Unanticipated inflation d.A change in investment e.A decrease in government spending
9. Problems and Applications Q3 Suppose an economy is in long-run equilibrium. The central bank raises the money supply by 5 percent. Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium. Price Level LRAS Aggregate Supply Aggregate Demand Quantity of Output Aggregate Demand 10 Aggregate Supply Now adjust the graph to show the new long-run equilibrium. What causes the economy to move from its short-run equilibrium to its long-run equilibrium? Nominal wages, prices, and perceptions adjust upward to this new price level. The government increases taxes to curb aggregate demand. The government increases spending to increase aggregate demand. Nominal wages, prices, and perceptions adjust downward to this new price level. According to the sticky-wage theory of aggregate supply, nominal wages at the initial equilibrium are nominal wages at the short-run equilibrium resulting from the increase in the money…
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According to Friedman, in which of the following situations is the economy in long-run equilibrium? a. The expected economic growth rate is 3 percent and the actual inflation rate is 3 percent. b. The average inflation rate over the past five years is 2 percent and the expected inflation rate is 2 percent. c. The expected inflation rate is 3 percent and the actual inflation rate is 3 percent. d. The expected economic growth rate is 2 percent and the expected inflation rate is 2 percent.
Now adjust the graph to show the new long-run equilibrium. What causes the economy to move from its short-run equilibrium to its long-run equilibrium? Ⓒ Nominal wages, prices, and perceptions adjust downward to this new price level. The government increases spending to increase aggregate demand. O Nominal wages, prices, and perceptions adjust upward to this new price level. The government increases taxes to curb aggregate demand. Which of the following is true according to the sticky-wage theory of aggregate supply as a result of the decrease in the money supply? Check all that apply. Nominal wages at the initial equilibrium are greater than nominal wages at the new short-run equilibrium. Nominal wages at the initial equilibrium are greater than nominal wages at the new long-run equilibrium. Real wages at the initial equilibrium are less than real wages at the new short-run equilibrium. Real wages at the initial equilibrium are less than real wages at the new long-run equilibrium.…
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5:07 A & & & P M Page 5 of 5 QUESTION 5 a. Suppose that some kind of significant economic event has occurred, and you learn that the event will de finitely cause the aggregate price level to decrease, but that its effect on short-run equilibrium real GDP cannot be determined without knowing the exact magnitude of its effects on Aggregate Supply and Aggregate Demand. Based on this information, do you think that this economic event shifted the Aggregate Demand curve, the Aggregate Supply curve, neither curve, or both curves? And if you think either or both of the curves shifted, indicate in which direction you think they must have shifted. b. The table below describes four sets of economic events. For each event, indicate whether it will shift the AD curve and/or the AS curve to the right (by entering "R"), to the left (by entering "L"), or not at all (by leaving it blank) AD S-R AS Events Shift Shift The government decreases unemployment insurance benefits The Federal Reserve decreases…
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