8. Economic fluctuations IThe following graph shows a hypothetical economy in long-run equilibrium at an expected price level of 120 and a natural output level of $300 billion.Suppose households suddenly begin to spend less and save more in order to increase saving for retirement.Using the graph, shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the sharpincrease in saving.PRICE LEVEL240200160120840100200300400OUTPUT (Billions of dollars)ASAD500600ADAS?In the short run, the decrease in consumption spending associated with the increase in saving causes the price level topeople expected and the quantity of output torate tothe natural rate of unemployment in the short run.the price levelthe natural level of output. The sharp increase in saving will cause the unemployment Again, the following graph shows a hypothetical economy experiencing long-run equilibrium at the expected price level of 120 and natural output levelof $300 billion, prior to the decrease in consumption spending associated with the increase in saving.Along the transition from the short run to the long run, price-level expectations willcurve will shift to theUsing the graph, illustrate the long-run impact of the sharp increase in saving by shifting both the aggregate demand (AD) curve and the short-runaggregate supply (AS) curve in the appropriate directions.PRICE LEVEL240200816012080400100200300400OUTPUT (Billions of dollars)ASAD500000In the long run, due to the sharp increase in saving, the price levellevel of output, and the unemployment rate,AD1ASthe natural rate.and theⒸthe quantity of outputthe natural

Savings are the funds that a consumer does not spend on products and services. It is a portion of…

8. Economic fluctuations I The following graph shows a hypothetical economy in long-run equilibrium at an expected price level of 120 and a natural output level of $300 billion. Suppose households suddenly begin to spend less and save more in order to increase saving for retirement. Using the graph, shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the sharp increase in saving. PRICE LEVEL 240 200 8 160 120 2 9 100 200 300 400 OUTPUT (Billions of dollars) AS AD 500 800 AD 2 AS ? in the short run, the decrease in consumption spending associated with the increase in saving causes the price level to meople expected and the quantity of output to ate to the price level the natural level of output. The sharp increase in saving will cause the unemployment the natural rate of unemployment in the short run.

8. Economic fluctuations I The following graph shows a hypothetical economy in long-run equilibrium at an expected price level of 120 and a natural output level of $300 billion. Suppose households suddenly begin to spend less and save more in order to increase saving for retirement. Using the graph, shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the sharp increase in saving. PRICE LEVEL 240 200 8 160 120 2 9 100 200 300 400 OUTPUT (Billions of dollars) AS AD 500 800 AD 2 AS ? in the short run, the decrease in consumption spending associated with the increase in saving causes the price level to meople expected and the quantity of output to ate to the price level the natural level of output. The sharp increase in saving will cause the unemployment the natural rate of unemployment in the short run.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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26. Assuming Aggregate Demand and Aggregate Supply are initially at ADo and ASo respectively, which of the following explains the adjustment towards long-run equilibrium depicted in Figure A? a) Unemployment (resulting from the short-run equilibrium being below LRAS) causes wages to decline, which increases AS until long-run equilibrium is attained at full employment level of income and a lower price level. b) Government spending is increased, increasing AD to a level sufficient to attain long-run equilibrium at full employment level of income and a higher price level. c) In attempting to produce beyond the economy's natural level of GDP, producers bid up wages and prices of other resources, causing the AS to decrease to the point where long-run equilibrium is restored. d) Taxes are increased reducing AD to a level consistent with long-run equilibrium.
The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion. Suppose firms become pessimistic about future business conditions and cut back on investment spending. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the business pessimism. 240 AS AD AS O PRICE LEVEL 200 160 120 80 40 AD
6. Determinants of short-run aggregate supply The following graph shows an increase in short-run aggregate supply (AS) in a hypothetical economy where the currency is the dollar. Specifically, the short-run aggregate supply curve shifts to the right from AS1 to AS2, causing the quantity of output supplied at a price level of 100 to rise from $200 billion to $250 billion. 175 AS₁ 150 AS₂ 125 100 4 75 50 25 50 100 150 200 PRICE LEVEL 200 0 0 250 QUANTITY OF OUTPUT 300 350 400 ? The following table lists several determinants of short-run aggregate supply. Inflation expectations Tax rates Technology Fill in the table by indicating the changes in the determinants necessary to increase short-run aggregate supply. Change Needed to Increase AS
12 Because fluctuations in the world oil price make the U.S. short-run macroeconomic equilibrium fluctuate, someone suggests that the government should vary the tax rate on oil, lowering the tax when the world oil price rises and in- creasing the tax when the world oil price falls, to stabilize the oil price in the U.S. market. How would such an action influence aggregate demand?
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3. Most global markets have been reporting severe contractions, which mainly responding to the COVID-19 pandemic. The situation is worsened by the decrease in people’s confidence in the government as policymakers, spreading a wave of pessimism towards the future prospect of the economy. Explain how such wave of pessimism, ceteris paribus, may lead to short-term economic fluctuations, which will eventually work to push the economy back towards its long-run equilibrium. Use relevant diagrams to support your answer.
5. Suppose that people’s preference for consumption fell. How would this change the aggregate demand: Increase, Decrease or No change at any given price: Decrease or Increase? How would this shift the AD curve: Leftward, Rightward, or No shift? Change in AD: Shift of AD:
8. Economic fluctuations I The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion. Suppose the government increases spending on building and repairing highways, bridges, and ports. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the increase in government spending. 240 AS 200 AD 160 AS 120 80 AD 40 200 400 600 800 1000 1200 OUTPUT (Billions of dollars) In the short run, the increase in government spending on infrastructure causes the price level to the price level people expected and the quantity of output to the natural level of output. The increase in government spending will cause the unemployment rate to the natural rate of unemployment in the short run. Again, the following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion, before the increase in…
7. The long-run aggregate supply curve and short-run adjustments Suppose an economy's short-run aggregate supply curve (SRAS), current equilibrium aggregate price level (P₁), and real GDP (Q1) are shown on the graph that follows. The economy currently has Natural Real GDP (QN) of $6 trillion. Use this information to place the orange long-run aggregate supply curve (LRAS, square symbols) in the correct position on the graph. 20 PRICE LEVEL 0 2 4 6 Q₁ REAL GDP (Trillions of dollars) 8 SRAS 10 LRAS
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8. Economic fluctuations I The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion. Suppose a sudden and severe contraction in the housing market reduces the value of homes and causes consumers to spend less. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the housing market slump. (2) 240 AS 200 AD 140 AS 120 80 AD 40 200 400 800 1000 1200 OUTPUT (BIlons of dollars) In the short run, the decrease in consumption spending associated with the housing market contraction causes the price level to * the price level people expected and the quantity of output to v the natural level of output. The housing market slump will cause the unemployment rate to the natural rate of unemployment in the short run. Again, the following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of…
8. Draw the macroeconomy in equilibrium (snowflake). What happens when aggregate demand increases? Show on graph. Label new short run equilibrium E2. What state is this economy in? a) Give an example of something that could have caused this. b) What happens to GDP and price level? c) In this scenario, what do we call the difference between actual GDP and potential GDP? d) What is the unemployment rate relative to the natural rate? e) How would the economy fix itself? This means market adjustments, not government intervention. Show on graph. Label new equilibrium E3. Briefly explain. US 1 1:3