Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 27, Problem 2.8P
Sub part (a):
To determine
The effect of expanding the money supply on the price level and
Sub part (b):
To determine
The effect of expansionary policy on the price level and GDP in the short-run.
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By using aggregate supply and demand curves to illustrate your points, discuss the impacts of the following events on the price level and on equilibrium GDP (Y) in the short run:
a. A tax cut holding government purchases constant with the economy operating at near full capacity
b. An increase in the money supply during a period of high unemployment and excess industrial capacity
c. An increase in the price of oil caused by a war in the Middle East, assuming that the Central Bank attempts to keep interest rates constant by accommodating inflation
d. An increase in taxes and a cut in government spending supported by a cooperative Fed acting to keep output from falling
The graphs illustrate an initial equilibrium for the economy. Suppose that the government increases taxes.
Use the graphs to show the new positions of aggregate demand (AD), short-run aggregate supply (SRAS), and long-run
aggregate supply (LRAS) in both the short run and the long run, as well as the short-run and long-run equilibriums resulting
from this change. Then, indicate what happens to the price level and GDP in the short run and in the long run.
Aggregate price level
Short-run graph
LRAS
SRAS
Short-run equilibrium
Real GDP
AD
Aggregate price level
Long-run graph
LRAS
Long-run equilibrium
Real GDP
AD
SRAS
gate
Aggregate price level
The graphs illustrate an initial equilibrium for the economy. Suppose that the stock market broadly increases.
Use the graphs to show the new positions of aggregate demand (AD), short-run aggregate supply (SRAS), and long-run
aggregate supply (LRAS) in both the short run and the long run, as well as the short-run and long-run equilibriums resulting
from this change. Then, indicate what happens to the price level and real GDP (or aggregate output) in the short run and in the
long run.
Short-run graph
Real GDP
LRAS
SRAS
Short-run equilibrium
AD
Aggregate price level
Long-run graph
LRAS
SRAS
Real GDP
Long-run equilibrium
AD
Chapter 27 Solutions
Principles of Economics (12th Edition)
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