Subpart (a):
Effect on Aggregate Demand and Supply.
Subpart (a):
Explanation of Solution
When consumers fear of an impending economic depression, their spending decline and they tend to save more. This leads to a decrease in AD curve. This can be explained by using figure 1.
In figure 1, horizontal axis represents the real GDP(
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Subpart (b):
Effect on Aggregate Demand and Supply.
Subpart (b):
Explanation of Solution
When a new tax is imposed on producers, cost of production comes up and there is no incentive to produce more. This leads to a decline in
In figure 2, horizontal axis represents the real GDP and vertical axis represents price level. In this case, the AS curve shifts left (from AS to AS1), this moves the equilibrium position from E to T, thus there is a decline in the output (from Q to Q1) and a rise in the price level (from P to P1).
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (c):
Effect on Aggregate Demand and Supply.
Subpart (c):
Explanation of Solution
Figure 3 can explain the shift in AD curve due to reduction in interest rates at each price level. In figure 3, horizontal axis measures the real GDP and vertical axis measures the price level.
A reduction in interest rates decreases the borrowing cost increases the spending.
This leads to a rightward shift of AD curve from AD1 to AD2. Thus, it brings the output and price level up. The output increases from Q1 to Q2 and price level increases from P1 to P2.
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (d):
Effect on Aggregate Demand and Supply.
Subpart (d):
Explanation of Solution
A major increase in spending shifts the AD curve to right. Figure 4 is used to explain this situation. In figure 4, horizontal axis measures the real GDP and vertical axis measures the price level.
Government expenditure is a key determinant of changes in the aggregate demand. The increase in government spending (spending for health care) increases the aggregate demand leading to a shift of AD curve from AD1 to AD2. Any real improvements in healthcare resulting from the spending would ultimately increase the productivity, thereby shifting the AS curve to the right (from AS1 to AS2). The equilibrium moves from a to c leading to an increase in output (from Q1 to Q3) . It will also move the price level up from P1 to P3.
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (e):
Effect on Aggregate Demand and Supply.
Subpart (e):
Explanation of Solution
The general expectation of surging inflation in the near future will increase the aggregate demand today because the consumers will want to buy products before their prices escalate. This can be illustrated using figure 3. As a result, there will be a rightward shift of AD curve from AD1 to AD2 which brings the output and price level up. In figure 3, the output increases from Q1 to Q2 and price level increases from P1 to P2.
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (f):
Effect on Aggregate Demand and Supply.
Subpart (f):
Explanation of Solution
Figure 5 is used to explain this case. In figure 5, horizontal axis measures the real GDP and vertical axis measures the price level.
As oil prices fall (oil is an imported resource) due to the disintegration of OPEC, it increases the U.S. aggregate supply. As a result, there will be a rightward shift of AS curve from AS to AS1. This brings the output level up from Q to Q1 and price level down from P to P1.
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (g):
Effect on Aggregate Demand and Supply.
Subpart (g):
Explanation of Solution
A reduction in the personal income tax rates raises take-home income increases consumer purchases at each possible price level. This is illustrated in figure 3. Tax cuts shift the aggregate demand curve to the right from AD1 to AD2 which brings the output and price level up. In figure 3, the output increases from Q1 to Q2 and price level increases from P1 to P2.
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (h):
Effect on Aggregate Demand and Supply.
Subpart (h):
Explanation of Solution
The sizable increase the labor productivity with no change in nominal wages will increase the overall productivity as more output is available for the given input. This increases the aggregate supply thereby shifting the AS curve to the right from AS to AS1 (Refer Figure 5). This leads to an increase in output (from Q to Q1) and a decrease in price level from P to P1.
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (i):
Effect on Aggregate Demand and Supply.
Subpart (i):
Explanation of Solution
This case can be explained using Figure 2. When there is an increase in nominal wages with no change in productivity, it increases per unit cost of production. This force the AS curve to shift left (from AS to AS1). The equilibrium position moves from E to T, thus there are a decline in the output (from Q to Q1) and a rise in the price level (from P to P1).
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Subpart (j):
Effect on Aggregate Demand and Supply.
Subpart (j):
Explanation of Solution
Figure 6 shows the impact of increasing demand and decreasing supply.
Figure 6 is used to explain this condition. The horizontal axis in Figure 6 measures the real domestic output whereas price level is measured by the vertical axis. A rise in net exports (higher exports relative to imports) shifts the aggregate demand curve to the right (from AD1 to AD2). But, due to the higher input prices, per unit cost is more, leading to a shift of the aggregate supply curve to the left from AS1 to AS2. This leads to an increase in output from Q to Q1 along with an increase in price level from P to P1.
Concept Introduction:
Aggregate demand (AD): Aggregate demand refers to the total value of the goods and services that are demanded at a particular price in a given period of time.
Aggregate supply (AS): Aggregate supply refers to the total value of the goods and services that are available for purchase at a particular price in a given period of time.
Want to see more full solutions like this?
Chapter 12 Solutions
MACROECONOMICS W/CONNECT
- What are the answers for a,b,c,d? Are they supposed to be numerical answers or in terms of a variable?arrow_forwardSue is a sole proprietor of her own sewing business. Revenues are $150,000 per year and raw material (cloth, thread) costs are $130,000 per year. Sue pays herself a salary of $60,000 per year but gave up a job with a salary of $80,000 to run the business. ○ A. Her accounting profits are $0. Her economic profits are - $60,000. ○ B. Her accounting profits are $0. Her economic profits are - $40,000. ○ C. Her accounting profits are - $40,000. Her economic profits are - $60,000. ○ D. Her accounting profits are - $60,000. Her economic profits are -$40,000.arrow_forwardSelect a number that describes the type of firm organization indicated. Descriptions of Firm Organizations: 1. has one owner-manager who is personally responsible for all aspects of the business, including its debts 2. one type of partner takes part in managing the firm and is personally liable for the firm's actions and debts, and the other type of partner takes no part in the management of the firm and risks only the money that they have invested 3. owners are not personally responsible for anything that is done in the name of the firm 4. owned by the government but is usually under the direction of a more or less independent, state-appointed board 5. established with the explicit objective of providing goods or services but only in a manner that just covers its costs 6. has two or more joint owners, each of whom is personally responsible for all of the partnership's debts Type of Firm Organization a. limited partnership b. single proprietorship c. corporation Correct Numberarrow_forward
- The table below provides the total revenues and costs for a small landscaping company in a recent year. Total Revenues ($) 250,000 Total Costs ($) - wages and salaries 100,000 -risk-free return of 2% on owner's capital of $25,000 500 -interest on bank loan 1,000 - cost of supplies 27,000 - depreciation of capital equipment 8,000 - additional wages the owner could have earned in next best alternative 30,000 -risk premium of 4% on owner's capital of $25,000 1,000 The economic profits for this firm are ○ A. $83,000. B. $82,500. OC. $114,000. OD. $83,500. ○ E. $112,500.arrow_forwardOutput TFC ($) TVC ($) TC ($) (Q) 2 100 104 204 3 100 203 303 4 100 300 400 5 100 405 505 6 100 512 612 7 100 621 721 Given the information about short-run costs in the table above, we can conclude that the firm will minimize the average total cost of production when Q = (Round your response to the nearest whole number.)arrow_forwardThe following data show the total output for a firm when specified amounts of labour are combined with a fixed amount of capital. Assume that the wage per unit of labour is $20 and the cost of the capital is $100. Labour per unit of time 0 1 Total Output 0 25 T 2 3 4 5 75 137 212 267 The marginal product of labour is at its maximum when the firm changes the amount of labour hired from ○ A. 0 to 1 unit. ○ B. 3 to 4 units. OC. 2 to 3 units. OD. 1 to 2 units. ○ E. 4 to 5 units.arrow_forward
- The table below provides the annual revenues and costs for a family-owned firm producing catered meals. Total Revenues ($) 600,000 Total Costs ($) - wages and salaries 250,000 -risk-free return of 7% on owners' capital of $300,000 21,000 - rent 101,000 - depreciation of capital equipment 22,000 -risk premium of 9% on owners' capital of $300,000 27,000 - intermediate inputs 146,000 -forgone wages of owners in alternative employment -interest on bank loan 70,000 11,000 The implicit costs for this family-owned firm are ○ A. $70,000. OB. $97,000. OC. $589,000. OD. $118,000. ○ E. $48,000.arrow_forwardSuppose a production function for a firm takes the following algebraic form: Q= 2KL - (0.3)L², where Q is the output of sweaters per day. Now suppose the firm is operating with 10 units of capital (K = 10) and 6 units of labour (L = 6). What is the output of sweaters? A. 64 sweaters per day OB. 49 sweaters per day OC. 109 sweaters per day OD. 72 sweaters per day OE. 118 sweaters per dayarrow_forward3. Consider a course allocation problem with strict and non-responsive preferences. Isthere a mechanism that is efficient and strategy-proof? If so, state the mechanismand show that it satisfies efficiency and strategyproofness. {hint serial dictatorship and show using example}4. Consider a course allocation problem with responsive preferences and at least 3students. Is there a mechanism that is efficient and strategy-proof that is not theSerial Dictatorship? If so, state the mechanism and show that it satisfies efficiencyand strategyproofness.5. Suggest a mechanism for allocating students to courses in a situation where preferences are non-responsive, and study its properties (efficiency and strategyproofness). Please be creativearrow_forward
- 3. Consider a course allocation problem with strict and non-responsive preferences. Isthere a mechanism that is efficient and strategy-proof? If so, state the mechanismand show that it satisfies efficiency and strategyproofness. {hint serial dictatorship}4. Consider a course allocation problem with responsive preferences and at least 3students. Is there a mechanism that is efficient and strategy-proof that is not theSerial Dictatorship? If so, state the mechanism and show that it satisfies efficiencyand strategyproofness.5. Suggest a mechanism for allocating students to courses in a situation where preferences are non-responsive, and study its properties (efficiency and strategyproofness). Please be creativearrow_forward2. a) Consider a market where one firm (firm 1) currently produces, but a second firm (firm 2) is intending to enter and sell an identical product. The market has inverse demand given by p = 40 – Q, where Q is the total output sold in the market. Firm 1 has a marginal cost of 16 and firm 2 has a marginal cost of c < 16, with no fixed cost for either firm. Firm 2 has a choice of competing on price or quantity, with firms making their choices simultaneously (i.e. the market will be either a Bertrand or Cournot duopoly). If you were advising firm 2 on entering this market, how would you advise it to compete? To what extent would the size of firm 2’s cost advantage affect your advice? b) Now assume that firm 2 is aware that other firms are considering entering the market, so the market may over time change from a duopoly to an oligopoly with more than two firms. This would not change the nature of competition (i.e. any additional firms would set price or quantity in line with the first…arrow_forward1. Consider two firms (i=1,2) interacting in the market. Assume that firms compete in quantities and therefore they choose either to cooperate or not in each round. If a firm deviates it earns monopoly profit for a round and a punishment phase will follow from next round onwards (for ever) where both firms choose the Cournot quantity. Assume a discounting factor & and that firms meet in the market in every period. The demand facing the industry is p = 1 92. Let Q = q1 + 92 denote the aggregate industry output - 91 - level. Assume further that production is costless.arrow_forward
Essentials of Economics (MindTap Course List)EconomicsISBN:9781337091992Author:N. Gregory MankiwPublisher:Cengage Learning
Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning
Principles of Macroeconomics (MindTap Course List)EconomicsISBN:9781285165912Author:N. Gregory MankiwPublisher:Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours...EconomicsISBN:9781337091985Author:N. Gregory MankiwPublisher:Cengage Learning
Principles of Economics, 7th Edition (MindTap Cou...EconomicsISBN:9781285165875Author:N. Gregory MankiwPublisher:Cengage Learning
Principles of Macroeconomics (MindTap Course List)EconomicsISBN:9781305971509Author:N. Gregory MankiwPublisher:Cengage Learning