Economics For Today
10th Edition
ISBN: 9781337670654
Author: Tucker
Publisher: Cengage
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Chapter 27.6, Problem 1YTE
To determine
New classical predictions of the impact of restrictive
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Two potential causes of inflation above target in the AD-AS model:
Demand-pull inflation: This occurs when aggregate demand (AD) increases more than the long-run aggregate supply (LRAS). In the AD-AS diagram, this would be represented by a rightward shift of the AD curve. The result is a higher price level and real GDP beyond the long-run macroeconomic equilibrium level.
Cost-push inflation: This occurs when the short-run aggregate supply (SRAS) curve shifts to the left due to increased production costs, such as rising wages or input prices. In the AD-AS diagram, this would be represented by a leftward shift of the SRAS curve. The result is a higher price level and a reduction in real GDP. how do i graph this information in an ad-as diagram
(a) As a response to the recent COVID-19 outbreak, the Commonwealth Government put in place lockdown restrictions. Using the dynamic AD-AS framework, analyse and demonstrate the impact of the COVID-19 pandemic on the level of output (or real GDP), unemployment, and inflation.
(b) In response to the COVID-19 pandemic, in March 2020 the Commonwealth Government announced a fiscal stimulus which included income support for workers and businesses hit by the pandemic. Using the same dynamic AD-AS framework used in part (a), explain and illustrate the effect of the fiscal stimulus on the level of output (or real GDP), unemployment, and inflation.
(c) Using the same dynamic AD-AS framework used in part (b), show what the impact of the fiscal stimulus would have been if Australia had no interactions in trade or finance with other economies (i.e. if Australia was a closed economy).
Within the Keynesian model with both a flexible price and flexible money wage, illustrate graphically and explain the effect of a decline in expectations. Include in your answer the effects of this policy shift on real output, the price level, employment, the money wage, and the interest rate. Explain what this question has to do with the typical Keynesian view of what causes recessions.
Chapter 27 Solutions
Economics For Today
Ch. 27.3 - Prob. 1YTECh. 27.6 - Prob. 1YTECh. 27 - Prob. 1SQPCh. 27 - Prob. 2SQPCh. 27 - Prob. 3SQPCh. 27 - Prob. 4SQPCh. 27 - Prob. 5SQPCh. 27 - Prob. 6SQPCh. 27 - Prob. 7SQPCh. 27 - Prob. 8SQP
Ch. 27 - Prob. 9SQPCh. 27 - Prob. 1SQCh. 27 - Prob. 2SQCh. 27 - Prob. 3SQCh. 27 - Prob. 4SQCh. 27 - Prob. 5SQCh. 27 - Prob. 6SQCh. 27 - Prob. 7SQCh. 27 - Prob. 8SQCh. 27 - Prob. 9SQCh. 27 - Prob. 10SQCh. 27 - Prob. 11SQCh. 27 - Prob. 12SQCh. 27 - Prob. 13SQCh. 27 - Prob. 14SQCh. 27 - Prob. 15SQCh. 27 - Prob. 16SQCh. 27 - Prob. 17SQCh. 27 - Prob. 18SQCh. 27 - Prob. 19SQCh. 27 - Prob. 20SQ
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- Consider a standard AD-AS model. The economy is affected by the following sequence of events. In period 1 there is a shock to the economy that is temporary. In period 2, the shock ends. But having observed an inflation outcome different to the inflation target, inflation expectations change from the inflation target to a value exactly equal to the observed inflation in period 1 (that is, expectations are not `anchored’). A temporary positive demand shock would lead to output above potential in period 1, but below potential in period 2. Answer true or false. Please briefly explain your answer.arrow_forwardConsider a standard AD-AS model. The economy is affected by the following sequence of events. In period 1 there is a shock to the economy that is temporary. In period 2, the shock ends. But having observed an inflation outcome different to the inflation target, inflation expectations change from the inflation target to a value exactly equal to the observed inflation in period 1 (that is, expectations are not `anchored’). A temporary Negative demand shock would lead to output below potential in period 1, but above potential in period 2. Answer true or false. Please briefly explain your answer.arrow_forwardPlease note I only need help with Part 4 and 5. I have answers for the other parts. Thank you so much for your time and effort! Figure 2: Keynes’s AD-AS Model (Image normally goes here) Part 1:Changes in which factors could cause aggregate demand to shift from AD to AD1? What could happen to the unemployment rate? What could happen to the inflation rate? Part 2: The Keynesian AD-AS model describes what happens with price levels when aggregate demand increases. Could you find any evidence from the last ten-fifteen years that might support AD-AS model descriptions of demand-pull inflation, cost-push inflation, and recession? For example, you could find data on the GDP’s of any two countries from 2000 to 2017 to support your findings. Please note the followong for the next 3 parts of this. In macroeconomics, the immediate short run is known as a length of time when both input prices and output prices are fixed. In the short-run, input prices are fixed but output prices are variable. In…arrow_forward
- Which of the following describes the use of Keynesian macroeconomic policy to resolve an inflationary gap problem in the economy? a) Unemployment, resulting from the short-run product markets equilibrium being below Long-run Aggregate Supply (LRAS), causes wages to decline, which increases short-run Aggregate Supply (AS), until long-run equilibrium is attained at full employment level of income and a lower price level. b) Government spending is increased, increasing Aggregate Demand (AD) to a level sufficient to attain long-run equilibrium at full employment level of income and a higher price level. c) In attempting to produce beyond the economy's natural level of GDP, producers bid up wages and prices of other resources, causing the short-run Aggregate Supply (AS) to decrease to the point where long-run equilibrium is restored. d) Taxes are increased reducing Aggregate Demand (AD) to a level consistent with full employment.arrow_forwardAccording to the Keynesian model, demand shocks affect output in the short run because: nominal wages are sticky. employment can be adjusted quickly. real wages do not change as inflation changes. None of the above.arrow_forwardPhilip's Curve and AD-AS Model: Use assumptions below to set up an initial point denoted as the point A for a and b. For each of the following draw an AD/AS diagram and a corresponding Philip's curve assuming the following: 1) Natural unemployment is 5% 2) Unemployment is 4% 3) Actual GDP is 20,000 4) Full employment GDP is 10,000 a)show in both diagrams the effect of a surprise increase in inflation. b)Show in both diagrams the effect of Friedman and the Natural rate Theory(Hint:using monetary policy in the short run, but self-correction in the long run) c) Show in both diagrams the effects of a decrease in income tax on price level, output,unemployment and inflation.(Hint: Fiscal Policy) d)show in both diagrams the effect of a decrease in expected inflation.arrow_forward
- How do Classical economists and Keynesian economists differ in their perceptions of how well markets and prices function? List and briefly explain the nature and functions of three market arenas. Which are the four components of the macroeconomy? Explain the interaction between these components through a circular flow diagram. Draw a graph of a business cycle. Label and explain each phase of the business cycle. Define the following concepts: Sticky Prices Expansion and contraction Inflation, Deflation and Hyperinflation Fiscal Policy and Monetary Policyarrow_forwardb) There is a change in expectations and firms in the economy now expect the price level to be lower in the future. In the context of the AS-AD model, and with the aid of a diagram, explain the short run effects this has on the price level output, and unemployment in the economy.arrow_forwardHayek says that markets will heal themselves and that government should not intervene. How does the AD-AS model reflect Hayek’s idea that governments cannot increase real GDP beyond the level that the free market economy is able to produce? Do you believe that the Hayek’s classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not?arrow_forward
- Figure 2: Keynes’s AD-AS Model Economics Online. (n.d.). Aggregate supply. Retrieved from http://www.economicsonline.co.uk/Managing_the_economy/Aggregate+supply.html 2.1. In Figure 2 above, what are the factors that may cause the aggregate demand to shift from AD to AD1? What is the difference between demand pull inflation, cost push inflation and recession?arrow_forwardConsider the AD-AS model below. The economy is in long-run equilibrium at point in period 1. Consider an increase in government spending. If the public has rational expectations, the economy will move to point If the public has adaptive expectations, the economy will move to point . In period 3 the AS will pass through point In the long run the AS will move to pointarrow_forwardUse a standard dynamic AS-AD model to explain how the macroeconomy adjusts following a favourable supply shock (vt < 0) for one period which reverts to zero for all subsequent periods. Assume that the economy starts from its long-run equilibrium. As a reminder, the DAD and DAS curves, respectively, are provided below: Y =Y - αθη 1+aly Tt = t_1+ ¢(Y - Y)+v where Y is output, πt is inflation, 0 and Oy capture the responsiveness of the central bank to inflation and output, a is the sensitivity of output to the real interest rate and is the sensitivity of inflation to the output gap. Y is the natural output level, and π* is the central bank's inflation target. [Hint: It will be helpful to work this question out using diagrams, but you are not required to provide them as part of your solutions.] -(πt - π* π*) + 1+aly Et A. (2 points) Explain the impact effect of this shock on output, inflation, and the real interest rate. B. (3 points) Explain the dynamic response of output, inflation, and…arrow_forward
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