ECN 204 Lecture Notes - Lecture 9: Aggregate Demand, Balanced Budget, Potential Output

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26 Jun 2016

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Equilibrium occurs at the price level that equalizes the amount of real output demanded & supplied: A price level too low would mean ad>as, putting upward pressure on prices across the economy. Similarly, a price level too high would mean ad

Related Questions

1. if the economy is at equilibrium on AD_2, policies that increase AD will

a. increase prices, but not real GDP

b. increase prices and increase real GDP

c. Decrease prices and real GDP

d. have no effect on the price level

2. if the economy is at equilibrium on AD₄, the best policy for maintaining full employment would be

a. contractionary policies to decrease AD

b. expansionary policies to increase AD

c. increase governmnet spending

d. do nothing to change AD

3. one of the macroeconomic goals is full employment, which economist equate to an unemployment rate of

a. 0% b. 1% c. 5% d. 100%

4. when foreign nations lower the value of their ecurrency relative to the US exports become ________ expensive and will cause US GDP to _______, ceteris paribus.

a. More, rise

b. Less, rise

c. More, fall

d. Less, fall

Here is the question and the answers. But I need an explanation of WHY the answer is what it is. Any answers that don't answer why for each one will only get 1 star.

What effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and level of real output. Assume that all other things remain constant.

a. A widespread fear of depression on the part of consumers.

b. A $2 increase in the excise tax on a pack of cigarettes.

c. A reduction in interest rates at each price level.

d. A major increase in Federal spending for health care.

e. The expectation of rapid inflation.

f. The complete disintegration of OPEC, causing oil prices to fall by one-half.

g. A 10 percent reduction in personal income tax rates.

h. A sizable increase in labor productivity (with no change in nominal wages).

i. A 12 percent increase in nominal wages (with no change in productivity).

j. Depreciation in the international value of the dollar.

ANSWERS

(a) AD curve left, output down and price level down (assuming no ratchet effect).

(b) AS curve left, output down and price level up.

(d) AD curve right, output and price level up (any real improvements in health care resulting from the spending would eventually increase productivity and shift AS right).

(e) AD curve right, output and price level up.

(f) AS curve right, output up and price level down.

(g) AD curve right, output and price level up.

(h) AS curve right, output up and price level down.

(i) AS curve left, output down and price level up.

(j) AD curve right (increased net exports); AS curve left (higher input prices)

sangriawildebeest451

In the AD-AS model, stagflation does not persist, because the working of the self-correcting mechanism of the economy _____ the level of output and _____ the price level until the economy eventually returns to a long-run equilibrium state, where actual output _____ potential output.

	decreases; decreases; falls short of
	increases; decreases; equals
	decreases; increases; exceeds
	decreases; increases; equals
	increases; decreases; exceeds

The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that

	Y* is independent of the price level and that actual output Y > Y* in the long run
	Y* equals actual output (Y) in the long run
	Y* is independent of the price level and that actual output Y = Y* in the long run
	Y* is independent of the price level
	Y* is independent of the price level and that actual output Y < Y* in the long run

Stagflation arises in the context of the AD-AS model when some external factor causes

	the LRAS curve to shift to the right
	the AD curve to shift leftwards
	the SRAS curve to shift downwards
	the SRAS curve to shift upwards
	the AD curve to shift rightwards

If the SRAS curve is positively sloped, then a decrease in the demand for Canadian-made goods in Europe will lead to _____ in the price level, in the short run.

	either an increase or a decrease
	no change
	an increase
	a decrease
	an initial increase, and then a decrease

Which of the following will shift the aggregate demand curve to the right?

	Consumers become pessimistic about the future
	A new technology is developed that will increase profits
	Income taxes are raised
	Foreign economies fall into recession, reducing their demand for domestic exports
	The government reduces purchases to balance the budget

Suppose a stock market crash decreases the stock of household wealth and therefore causes autonomous consumption to fall. Which of the following is the likely result?

	A leftward shift the AD curve
	There will be no movement of the AD curve
	A movement down the AD curve
	A movement up the AD curve
	A rightward of the shift the AD curve

An economy is characterized by the AD equation P = 200 ? 0.02Y, SRAS equation P = 100 and LRAS equation Y* = 5000. In the absence of any change in policy or exogenous shocks, this economy will achieve a long-run price level of

	100
	110
	120
	90
	105

The AD-AS model depicts a self-correcting economy. This means that the price level in the model adjusts automatically in response to a(n) _____ gap, so as to eliminate the _____ gap in the long run, without requiring any help from government policies.

	recessionary; recessionary
	recessionary; expansionary
	expansionary; expansionary
	output; output
	expansionary; recessionary

The aggregate demand curve shows

	the amount of planned aggregate expenditure (and output) at the current price level
	the amount of planned aggregate expenditure (and output) at an average price level
	the amount of planned aggregate expenditure (and output) at a constant price level
	the amount of planned aggregate expenditure (and output) at various price levels
	the amount of planned aggregate expenditure (and output) at last year's price level

Consider an economy initially at long-run equilibrium with output (Y) equal to potential output (Y*). If the SRAS is positively sloped, then a shift to the right of the AD curve will lead to _____ in the price level, in the short run. In the long run, the SRAS curve will shift to the _____ and the equilibrium will be at __________.

	an increase; left; Y = Y*
	a decrease; right; Y > Y*
	an increase; right; Y = Y*
	a decrease; left; Y > Y*
	no change; left; Y = Y*

ECN 204 Lecture Notes - Lecture 9: Aggregate Demand, Balanced Budget, Potential Output

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