Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Chapter 10, Problem 3QQ
To determine
Indicators of recession.
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a) Explain what happens to Money Demand when each of the following occurs:
i, incomes rise;
ii. the interest rate rises.
b. Use the money market to explain why the aggregate demand curve slopes downward.
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A) List and explain in detail, the components of Aggregate Demand and explain each of their determinants. List the four components and explain them and under each list and explain the determinants of each.
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- One explanation for the negative slope of the aggregate demand curve is the "wealth effect" (aka the "real‑balances" effect). What is this effect? a. As inflation occurs, consumers buy fewer goods and services because the value of their accumulated wealth declines. b. Interest rates increase when prices rise as consumers try to borrow larger amounts of money to maintain their consumption. The higher interest rate discourages spending. c. As inflation occurs, the purchasing power of consumers increases as accumulated wealth increases in value. d. For normal goods, people buy more of a product if their income increases. According to the wealth effect, what happens as the price level falls? a. Consumption spending decreases and investment spending increases. b. Consumption spending decreases. c. Consumption spending increases and investment spending decreases. d. Consumption and investment spending increase. e. Consumption and investment spending…arrow_forwardWhat is the effect of a rise in the money wage rate when the economy is at potential GDP? A rise in the money wage rate when the economy is at potential GDP A. does not change potential GDP but increases real GDP along the AS curve. B. decreases potential GDP because the full-employment quantity of labor decreases C. does not change aggregate supply but decreases production D. decreases aggregate supply because a rise in the money wage rate increases costs, so firms employ fewer workers Click to select your answer.arrow_forward3/25/22, 8:59 PM Assignment Print View 8. Assume the economy is currently in equilibrium at its full-employment level of output, the money market is in equilibrium, and the MPC = 0.75. a. Suppose there is an increase in government spending that causes aggregate demand to increase by $16 billion. Show the increase in aggregate demand on the graph. Instructions: Use the tool provided "Aggregate Demand" to plot the new aggregate demand curve. Use the tool provided "New GDP" to plot the new equilibrium. AD and AS Model 200 Tools LRAS 180 AS 160 Aggregate Dei New GDP 140 120 100 80 60 AD 40 20 16 32 48 64 80 96 112 128 144 160 Real GDP (billions of dollars) Now suppose the Federal Reserve wants to keep inflation from hurting the economy and maintain output at the full-employment level. https://ezto.mheducation.com/hm.tpx?todo=c15SinglePrintView&singleQuestionNo=8.&postSubmissionView=13252718377637707&wid=13252718466136846&rol... 1/3 Price Levelarrow_forward
- Suppose home owners owe $8 trillion in mortgage loans. a. If the mortgage interest rate is 4 percent, approximately how much are home owners paying in annual mortgage interest? $ billion b. If the interest rate drops to 3.5 percent, by how much will annual interest payments decline? $ billion c. How will this change in the interest rate impact aggregate demand? Aggregate demand will .arrow_forwardExplain how an increase in a price level will affect the demand for money and the aggregate demand. Use relevant graphs to support your answer.arrow_forwardThe graph below shows the long-run aggregate supply (LRAS), the short-run aggregate supply (SRAS), and aggregate demand (AD) curves for a given economy. LRAS 10 Manipulate the curves to show the long run effect of an increase in money supply. 9. SRAS 8. In the long run, an increase in the money supply will result in the following. 6. Real GDP: 3 AD 1 0. 01 1 4 6. 8. 6. 10 Real GDP The aggregate price level decreases stays the same increases 2. 7, 5. Aggregate price levelarrow_forward
- Need help with this. Thanks!arrow_forwardExplain under the following circumstances what will happen to the aggregate demand and/or aggregate supply. a. People have less disposable income on their hand due to an increase in the taxes b. Investors thinks the market soon going to face recession and therefore, expect less returns C. The U.S government limits the number of working visas d. Less foreigners are investing in the U.S in the form of Foreign Direct Investment Make sure to provide reasoning for your response. For the toolbar, press ALT+F10 (PC) or ALT+FN+F10 (Mac). BIUS Paragraph Arial == ווין T {;} P RA KJ X² X₂ 10pt >¶¶< + ABC ¶T ¶¶ Ω Θ Ix X X Q5 88 : A = 旺图 O WORDS POWERED BY TINYarrow_forwardThe United States is at full employment when the Fed cuts the quantity of money, other things remaining the same. Which explains correctly the sequence of effects and the effect of the cut in money supply on aggregate demand? 1. We start with the money market equilibrium. The money supply curve shifts to the right and the rate of interest rises. This will decrease real investment that we can see from the Investment demand function. The AE curve will move down as investment (Ibar) declines. This will shift the AD to the left. 2. We start with the money market equilibrium. The money supply curve shifts to the left and the rate of interest rises. This will increase real investment that we can see from the Investment demand function. The AE curve will move down as investment (Ibar) declines. This will shift the AD to the left. 3. We start with the money market equilibrium. The money supply curve shifts to the left and the rate of interest rises. This will decrease real…arrow_forward
- Explain the likely effects of a U.S. boom on the demand for Canadian exports. What would be the effect on Canadian aggregate demand? Suppose the Bank of Canada viewed its monetary policy as being appropriate for keeping GDP of Canada close to potential GDP. What would you then predict to be the Central Bank's response to the foreign boom in U.S.?arrow_forwardExamine the following policies and determine which would decrease the level of aggregate demand. Group of answer choices A. Decreasing in government spending and decreasing taxes B. Increasing investment and increasing government spending C. Decreasing in government spending and increasing in taxes D. Increasing consumption and decreasing taxesarrow_forward5:09 C A & 1 & P M - 32% Page 8 of 5 QUESTION B2 The figure below depicts aggregate demand and aggregate supply in the nation of Pacifica in 2019. Long-Run AS Short-Run AS AD Real GDP At the beginning of 2020, a wave of business optimism led producers to sharply increase their planned investment expenditure. a. What effect, if any, will this increased investment expenditure have in the short-run on the Aggregate Demand curve? What effect, if any, will it have on the Short-Run Aggregate Supply curve? b. After the increased investment expenditure, will short-run equilibrium real GDP be above or below potential GDP? How do you know? The president of Pacifica is concerned about the effect of this new investment expenditure on the economy, and she wishes to use monetary policy to move equilibrium GDP back toward potential GDP. (For the remainder of the question, assume that the Pacifica Central Bank is Pacifica's version of the United States Federal Reserve, that Pacifica's banking and…arrow_forward
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