Figure: Aggregate Demand and Aggregate Supply 1 Inflation rate 10 9 8 7 6 5 4 3 2 1 0 0 A. B. 1 O c. D. LRAS C 2 3 4 5 6 7 8 D SRAS AD If the money supply has increased, the long-run equilibrium in this economy will occur at intersection: Real growth rate 9 10
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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.Refer to the table below. Real Output Real Output Demanded, Original, Supplied, Billions Price Level Billions $504 108 $515 507 104 512 510 100 510 513 96 507 516 92 500 Suppose that aggregate demand increases such that the amount of real output demanded rises by $11 billion at each price level. Instructions: Enter your answers as a whole number. a. By what percentage will the price level increase? percent Will this inflation be demand-pull inflation, or will it be cost-push inflation? |(Click to select) b. If potential real GDP (that is, full-employment GDP) is $510 billion, what will be the size of the positive GDP gap after the change in aggregate demand? billion c. If government wants to use fiscal policy to counter the resulting inflation without changing tax rates, would it increase government spending or decrease it? |(Click to select) ♥4. Suppose that people expect inflation to equal 3 percent, but in fact prices rise by 5 percent. Indicate whether this unexpected higher rate of inflation would help or hurt each of the following groups. a homeowner with a fixed-rate mortgage. a union worker with a fixed labor contract a company that has invested some of its endowment in a government bonds which pay a fixed rate of return. 5. Indicate how each of the following events would affect the aggregate demand AD curve: a short-run decrease in the price level an increase in consumer confidence on the price level and real GDP an increase in government purchases
- 6. Monetary policy in the long run Consider a hypothetical economy that produces at its long-run macroeconomic equilibrium at a price level of 100. Suppose the real GDP of this economy grows at an annual rate of 2%. If the velocity of money is constant, the central bank can maintain the price level at 100 by means of which of the following? Expanding the money supply by 2% per year O Reducing the money supply by 2% per year les of O Keeping the money supply constant Suppose the central bank enacts an unanticipated restrictive monetary policy. As a result, the supply of loanable funds leading to a in short-term interest rates. The following graph shows the goods and services market of this economy at full employment. Assume that potential output remains constant. Adjust the graph to show the long-run effect of an unanticipated restrictive monetary policy on the goods and services market by dragging the 511 8/2/ aggregate demand (AD) curve, the short-run aggregate supply (AS) curve, or…Exhibit 14A-2 Macro AD-AS Model Price Level CPI 130 120 110 100- - 8 90 0 9.0 9.6 LRAS SRAS 10.0 10.5 AD L 11.0 Real GDP (trillions of dollars per year) F 11.5 In Exhibit 14A-2, the long-run aggregate supply curve represents: potential real GDP output for this economy. that the economy is experiencing zero inflation. that the economy is experiencing a recessionary gap. the level of real GDP where the unemployment rate is zero.4. An economy is described by the following equations: Y 4,000+2(MIP) AD SRAS Okun's Law Y= Y +100(P-P) (Y-YY=-2(u-u) In this economy full-employment output Ỹ equals 6,000 and the natural unemployment rate u equals 0.05. a. Suppose that the nominal money supply has long been constant at M 4,000 and is expected by the public to remain constant forever. What is the long-run equilibrium value of the price level (P)? What is the equilibrium value of the expected price level (P)? What is the long-run equilibrium value of output (Y)? What is the long-run equilibrium value of the unemployment rate (u)? b. A totally unexpected increase in the money supply occurs, raising it from 4,000 to 4,400. What is the short-run equilibrium value of the expected price level? What is the short-run equilibrium value of the price level? What is the short-run equilibrium value of output? What is the short-run equilibrium value of the unemployment rate? What is the value of cyclical unemployment? What is the…
- 5. The slope and position of the long-run aggregate supply curve Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. The level of technological knowledge The quantity of physical capital The inflation rate The price level Suppose the economy produces real GDP of $60 billion when unemployment is at its natural rate. Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph. 132 128 LRAS 124 120 7 H a r i 18 OA Wall Street Journal offered the following opinion of the bond market in September 2012, when inflation rate was about 2%: Ac€A?Someone buying long-term bonds yielding 1.5% or 2% and then seeing consumer price inflation of 4%, will be on the loosing end of the betAc€??. a. Explain verbally and illustrate graphically what will happen to the price of bonds if expected inflation increases to 4% from 2%. Be sure to include in your answer the demand the bond market. b. Explain why someone buying long-term bonds yielding 1.5% or 2% and then seeing consumer price inflation of 4%, will be on the loosing end of the bet. c. Suppose that you expect a greater increase in inflation than do others investors, but that you do not expect the increase to occur until 2015. Should you wait until 2015 to sell your bond? Briefly explain. d. The columnist also argued that long-term bonds would be a good investment if only Ac€A? when we get serious price deflationAc€?? Ac€?c *Explain verbally and illustrate…All of the following statements are generally true EXCEPT: OA. The rate of change in nominal wages is positively correlated with the rate of change in other money prices. OB. The rate of change in nominal wages is negatively correlated with the unemployment rate. OC. The output gap is negatively correlated with the inflation rate. OD. The unemployment rate is negatively correlated with the deviation of aggregate economic activity from trend. OE. The inflation rate is positively correlated with the deviation of aggregate economic activity from trend.
- 9. Money Supply 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. RANDO LHAS Aggregale Supply * A Demand Quantity of Oulpul Now adjust the graph to show the new long-run equilibrium. Aggregate and - Aggregate Supply What causes the economy to move from its short-run equilibrium to its long-run equilibrium? The government increases taxes to curb aggregate demand. The government increases spending to increase aggregate demand. O Nominal wages, prices, and perceptions adjust downward to this new price level. O Nominal wages, prices, and perceptions adjust upward to this new price level. Which of the following is true according to the sticky-wage theory of aggregate supply as a result of the increase in the money supply? Check all that apply. Nominal wages at the initial equilibrium are equal to…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.…11. Figure: Negative Supply Shock Inflation rate, T 16% 12% 11% 9% 3% Opoint A. Opoint B. B O point X. Opoint V -3% -2% -1% 3% Reference: Ref 16-4 (35-4) (Figure: Negative Supply Shock) Refer to the figure. This economy initially begins at point A and a negative supply shock takes it to point Y. If the Fed reacts by increasing money growth by 3%, this would take the economy to: Real GDP growth rate