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.
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Chapter 32 Solutions
Economics (Irwin Economics)
- 4. Consider the following regression equation, where Google is equal to 1 if an individual in thesample has worked at Google and 0 otherwise, and Earnings is annual earnings in thousands ofpounds (standard errors in parentheses):Earnings \ = 25000(12.5)+ 42000(7.0)Google,(a) Interpret the coefficient on Google.(b) Is the coefficient on Google statistically significant at the 5% level? How do you know?(c) Suppose that instead of Google we had used a variable called NeverGoogle, equal to 1 if anindividual has never worked at Google and 0 otherwise. (i) How would the slope coefficientchange? (ii) What would happen to the intercept? (d) What prevents us from interpreting the coefficient on Google as a causal effect? Give examplesin your answer.arrow_forward4. Examine the regression table below before answering the questions that follow.Throughout, the Log() function represents the natural logarithm, so that Log(e) =1:Dependent Variable: Log(Expenditures on Cigarettes + 1)Method: Least SquaresVariable Coefficient Std. ErrorConstant 0.50 0.41Log(Income+1) −0.02 0.002(a) Why are the dependent and explanatory variables in the form log(1+x), ratherthan log(x)? (b) Which of the above coefficients are statistically significant? How do you know?(c) Interpret the coefficient on Log(Income+1). (d) What is the predicted level of Log(Expenditures on Cigarettes + 1) for anobserved individual with income of e10 − 1? (4arrow_forward3. Consider the following three (fictional) data points:Country Ultima Thule Narnia NeverlandGDP per capita (US $, 2021, in thousands) 10 30 20Deaths from COVID-19 as of Jan. 2023, millions 0.24 0.16 0.05(a) What is the slope of the line of best fit through these three points, whereDeaths from COVID-19 is the dependent variable and GDP per capita is theexplanatory variable? (b) The standard error for the slope parameter is 0.009. What does this standarderror measure? (c) Is the slope parameter statistically significant at the 5% level of significance?(The relevant critical value is not the usual value, but 4.303, due to the tinysample size). Explain what this means. (d) Why might this slope parameter be a misleading indicator of the relationshipbetween these two variables?arrow_forward
- Consider the following estimated regression equation, where both Rent and Earnings aremeasured in pounds (£) at the individual level (standard errors in parentheses):log(\Rent) = 6.9(0.69)+ 0.9(0.3)log(Earnings),(a) Interpret the coefficient on log(Earnings). (b) If we divided Earnings by 1000, so that it is measured in 1000s of pounds instead of pounds,how would (i) the slope, (ii) the intercept change in the above equation? Now suppose the variable London is added, which is equal to one if an individual iives inLondon, and zero otherwise. The estimated regression equation changes to:log(\Rent) = 6.22(0.622)+ 0.5(0.05)log(Earnings) + 2(0.5)London,(c) Interpret the coefficient on London. (d) Explain why the coefficient on log(Earnings) when London is included in the regression andthe coefficient on log(Earnings) when London is not included in the regression are not thesame.arrow_forward3. Consider the following regression equation, where Cigs is daily spending on cigarettes in poundssterling (£), Y earsEduc is years of education, and F emale equals one if an individual is femaleand zero otherwise (standard errors in parentheses):Cigs [ = 4(1.6)− 0.08(0.032)Y earsEduc − 0.5(0.2)F emale,(a) Interpret the coefficients on Y earsEduc and F emale. (b) What does the model predict the average daily spending on cigarettes would be for womenwith 12 years of education? (c) Form the 95% confidence interval for the coefficient on F emale. (d) Economists are often interested in estimating production functions of the Cobb-Douglas form(Yiis the ith firm’s output, Liits spending on labour, and Kiits spending on capital):Yi = ALαi Kβi,How might someone estimate α and β from this equation using linear regression?arrow_forward2. The demand and supply functions for two interdependent goods X and Y are givenbyQDX = 7 − 4PX + 2PYQSX = −6 + 4PX − PYQDY = 1 + PX − PYQSY = −4 − PX + 2PY(a) Find the market equilibrium condition for each good. (b) Express the equilibrium conditions in the matrix form Ax = b.(c) Find the inverse of matrix A. (d) Given your result in part (c), calculate the equilibrium prices. (e) What is the equilibrium quantity for goods X and Y ?arrow_forward
- 2. A two-sector macro-economic model satisfies the following structural equations:Y = C + I∗C = aY + bwhere 0 < a < 1 and b > 0 are parameters and I∗ denotes investment.(a) What are the exogenous and endogenous variables in this model? (b) Re-arrange this system of equations to express the endogenous variables in terms of the exogenous variables and parameters. (c) Express this system of equations in the matrix form Ax = b. (d) Show that the inverse of matrix A exists.arrow_forwardThe equilibrium prices P1 and P2 for two goods satisfy the equations:−4P1 + P2 = −132P1 − 5P2 = −7(a) Express this system of equations in the matrix form Ax = b. (b) What is the determinant of matrix A? (c) Find the inverse of matrix A. (d) Using matrix algebra, calculate the equilibrium pricesarrow_forward1. An individual’s utility function is given as, where x1 and x2 denote the number of units consumedof goods 1 and 2 respectively:U = x121 x132,(a) Express the marginal utilities of x1 and x2. (b) Show that the marginal utility of x1 is positive and interpret this result. (c) Find the value of the marginal utilities when x1=16 and x2=8. (d) Find the marginal rate of commodity substitution at this point. (e) Estimate the change in utility when x1 and x2 both increase by 1 unit.arrow_forward
- Which of the following graphs best represents the production possibility frontier of Country Y (Line Y), the production possibility frontier of Country Z (Line Z), and the production possibility frontier of this whole economy (Line W)? (Hint: Find W by adding the productive capabilities of Country Y and Z) Group of answer choicesarrow_forwardWhich of the following factors tend to decrease the wage differential between union and non union workers: unions tend to organize the firms with the lowest ability to pay initially all of the above unions must moderate their wage demand to keep workers competitive some nonunion employers pay their employees above union wages only ‘a’ and ‘b’ abovearrow_forwardThe accompanying graph shows the short-run demand and cost situation for a price searcher in a market with low barriers to entry. Price (dollars) 24 8 MC ATC MR 30 D 45 50 Quantity/time The firm will maximize its profit at a quantity of units. After choosing the profit maximizing quantity, the firm will charge a price of The firm will receive $ in revenue at the profit-maximizing quantity. The total cost of production for this profit-maximizing quantity is S The maximum profit the firm can earn in this situation is $ per unit for this output. How will the situation change over time? Profits will attract rival firms into the market until the profit-maximizing price falls to the level of per-unit cost. ◇ Losses will induce firms to leave this market until the profit maximizing price falls to zero. The market will adjust until the price charged by this firm no longer exceeds marginal cost at the profit-maximizing quantity. This market is already in long-run equilibrium, and will not…arrow_forward
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