The diagram on the right shows the short-run and long-run Inflation Rate (%) Phillips curves for an economy. a. b. C. What is the economy's noncyclical rate of unemployment? What is the expected rate of inflation? Starting from Point A, suppose asset prices rise, which leads to an increase in consumption and increase in aggregate demand. In the short run, will the economy move to a point like Point B or a point like Point C in the diagram or stay at Point A? 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 1.5 2.5 3.5 4.5 5.5 6.5 unemp 7.5 rate (0-

The diagram on the right shows the short-run and long-run Inflation Rate (%) Phillips curves for an economy. a. b. C. What is the economy's noncyclical rate of unemployment? What is the expected rate of inflation? Starting from Point A, suppose asset prices rise, which leads to an increase in consumption and increase in aggregate demand. In the short run, will the economy move to a point like Point B or a point like Point C in the diagram or stay at Point A? 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 1.5 2.5 3.5 4.5 5.5 6.5 unemp 7.5 rate (0-

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter24: The Aggregate Demand/aggregate Supply Model

Section: Chapter Questions

Problem 53CTQ: The AD/AS model is static. It shows a snapshot of the economy at a given point in time. Both...

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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
Suppose that the money supply increases by 20 percent. If there is no inflation, what does the quantity theory of money tell us must happen to real GDP? (Assume that the velocity of money is constant.) Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a It must increase by more than 20% It must increase by less than 20% C It stays the same d. It must increase by 20%
What is wrong (if anything) with each of the following statements? a. “In the 'Intermediate Run' an increase in the real interest rate leads to a reduction in Investment and an increase in Consumption." 5. "Because of the Classical Dichotomy, the monetary conditions in the nominal side of the economy have a direct impact on conditions in the real side of the economy." c. "In the 'Intermediate Run', the aggregate supply curve is upward sloping." d. "In the 'Intermediate Run' model, an increase (a rightward shift) in the 'IS' curve will lead to an increase in output and an increase in the real interest rat" e. "In the 'Intermediate Run' model, an increase in the technology parameter (A†) will lead to increased employment, an expansion of output, and an increase in the real interest rate." f. "In the 'Intermediate Run' model, an increase in government expenditures will lead to a permanent expansion in output." g. "Ricardian Equivalence suggests that households can infer an increase in…
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.
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Consider an economy with the following measures: (a) The nominal interest rate is 2%. The rate of growth of money supply is 5%. The velocity growth is constant. What is the growth in nominal GDP? ) In the context of introduction of robots into manufacturing, what is the difference be- (b) tween the productivity effect and the reinstatement effect? (c) thinking about the effect of higher capital income taxes. 3) Briefly describe any two of the three elasticities that Diamond and Saez mention in
K How does expected inflation occur? Use the graph to answer this question. Draw the AD curve when it is correctly expected that the inflation rate will be 15 percent a year. Label it. Draw the SAS curve when a change to the money wage rate occurs that correctly anticipates the increase in aggregate demand. Label it. Draw a point at the new equilibrium. As we move up along the LAS curve, the O A. real wage rate is increasing OB. real wage rate is decreasing OC. real wage rate is constant O D. money wage rate is constant 130- 120+ 110- 100- Price level (GDP deflator, 2007 = 100) LAS 90- 100 SAS 1200 AD 800 1000 1050 1100 1150 1200 1250 1300 1350 1400 Real GDP (billions of 2007 dollars) >>> Draw only the objects specified in the question.
10. What does the AD curve represent economically? A. It represents the difference between actual real GDP and nominal GDP B. It describes how the Fed chooses short-run output based on inflation C. It describes how the velocity of money can fluctuate in the short run D. All of the above
1. Paul and Mary wanted to get married, and they wished to purchase a house for the new family. Therefore, they had arranged a meeting with a banker to know more about the mortgage details. They all expected that inflation will be 3 percent over the borrowing period, and the banker offered them a nominal interest rate of 6 percent. As it turns out, the inflation was 5 percent over the term of the loan. a. What was the expected real interest rate? b. What was the actual real interest rate? c. Who benefited and who lost because of the unexpected inflation?
5. , Assume, while an economy is in long-run equilibrium, an adverse supply shock occured, such as energy prices have incrased. The central bank decides to accommodate this shock and restores the equilibrium quickly. What would be the effect of this policy action on inflation? Explain and illustrate with the help of an AD-AS diagram. 1
When stagflation began to appear in the US economy in the late 1960s, economists and policymakers were perplexed because they had never seen __________ and __________ at the same time. a. high inflation rates; high interest rates b. a stagnant economy; high unemployment rates c. high unemployment rates; high growth rates d. high inflation rates; high unemployment rates
The Fed is fighting recession and it happens to overstimulate the economy. If the expected inflation rate rises above the 2 percent goal, what is the cost of returning the inflation rate back to its goal? The cost of returning the inflation rate back to its goal is _______. A. an inflationary gap and an even higher inflation rate than initially B. unemployment below the natural unemployment rate C. a decrease in potential GDP and aggregate supply D. a recessionary gap and a higher unemployment rate