ECO102H1 Lecture Notes - Lecture 7: Normal Good, Aggregate Supply, Price Level

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Why we have a downward sloping demand curve (micro): People switch out of x and switch into y. Px increases, same income, purchasing power decreases as if decrease in income => quantity demanded of normal good decreases. Why the aggregate expenditure demand curve is downward sloping (macro) Wealth effect: retirement saving : purchasing power increases, need to save more (cut back on consumption), reducing autonomous consumption. Savings decrease, decrease in supply of loanable funds. Borrowing increases, increase in demand of loanable funds. Interest rate increases investment decreases aggregate expenditure (p1) shifts down (p2) Why the aggregate demand curve will shift. If the consumer confidence is optimistic , they"re willing to spend more at every level of y. Same for business outlook , shifting aggregate demand curve to the right. Stock market crash: shifts aggregate demand curve to the left, consumer and firms become pessimistic. Ae = c + i + g.

Related Questions

PLEASE HELP WITH ONLY THE BOLDED QUESTION THANK YOU

Consider the market for new, single-family homes in New Orleans. The general demand function for new housing in New Orleans is estimated to be Qd =15-2P+0.05M+0.10R where Qd is the monthly quantity demanded, P is the price per square foot, M is average monthly income in New Orleans, and R is the average monthly rent for a three-bedroom apartment in New Orleans. Qd is measured in units of 1,000 square feet per month. 1. New housing in New Orleans is a(n) __________________ (normal, inferior) good. How can you tell from the general demand function? 2. New housing and three-bedroom apartments are _________________ (substitutes, comple- ments) in New Orleans. How can you tell from the general demand function? 3. If average monthly income is $1,500 and the monthly rental rate for three-bedroom apart- ments is $700, then the demand function for new housing in New Orleans is Qd = _____________________________________. 4. Graph the demand curve for new housing in New Orleans on the axes provided below. Label the demand curve D0. 5. What happens to demand when the following changes occur? a. b. c. d. e. The price of the commodity rises. Income decreases and the commodity is normal. Income decreases and the commodity is inferior. The price of a complement good increases. The price of a substitute good decreases. The general supply function for new housing in New Orleans is estimated to be Qs =96+2P-10PL -4PK where P is the price per square foot of new housing in New Orleans, PL is the average hourly wage rate for construction workers, and PK is the price of capital (as measured by the average rate of interest paid on loans to home builders). Qs is measured in units of 1,000 square feet per month. 6. Does it make sense for PL and PK to have negative coefficients in the general supply func- tion? Explain why or why not. 7. If the average hourly wage rate for construction workers is $10 per hour and the average rate of interest on loans to builders is 9 percent (i.e., PK = 9), then the supply function for new housing is Qs = ______________________. 8. Graph the supply curve for new housing in the graph below. Label supply S0. 9. Other things remaining the same, what would happen to the supply of a particular commodity if the following changes occur? a. The price of the commodity increases. b. Government regulators outlaw the use of a technology that enables the good to be produced at a significantly lower cost. c. The prices of inputs used to produce the commodity decrease. d. The price of a commodity that is a substitute in production increases. e. Managers expect the price of the good to fall in the near future. f. As the cost of capital rises, firms in the industry stop purchasing plant and equip- ment, which allows depreciation to diminish the productive capacity in the indus- try. 10. Solve mathematically for equilibrium price and quantity. Show your work: PE = $__________ per square foot. QE = __________ square feet per month (in 1,000s). 11. Do your supply and demand curves intersect at PE and QE found in question 8 above? Should they? 12. In equilibrium found in question 8, compute total consumer, producer, and social surpluses: CS = $____________ PS = $____________ SS = $____________ 13. Suppose New Orleans suffers a serious recession that causes average monthly income to fall from $1,500 to $1,100 per month. If other things remain the same, the demand for new hous- ing in New Orleans is now: Qd = _______________________. Plot this new demand curve in the figure below. Label it D'. 14. Suppose that because of the recession in New Orleans, the wage rate for construction workers falls to $8 per hour. If other things remain the same, the supply of new housing in New Orle- ans is now: Qs = _______________________. Plot this new supply curve in the figure. Label the new supply curve S'. 15. After income falls to $1,100 and wages fall to $8, new equilibrium price and quantity are PE = $__________ per square foot QE = __________ square feet per month (in 1,000s) 16. Determine the effect upon equilibrium price and quantity sold if the following events occur in a particular market: a. The price of a substitute good (in consumption) decreases. b. Consumersâ income increases and the good is inferior. c. Government regulators decide to outlaw a cost-reducing technological process in order to protect the environment. d. The price of a complement good (in production) increases. e. The price of inputs used to produce the good decrease. f. Consumers expect that the price of the good will fall in the near future. g. It is widely publicized that consumption of the good is helpful in prevent- ing cancer. h. The price of a substitute good (in production) decreases. 17. Suppose that a pair of events from problem 15 occur simultaneously. For each of the pairs of events indicated below, perform a qualitative analysis to predict the direction of change in either the equilibrium price or the equilibrium quantity. Explain why the change in one of these two variables is indeterminate. a. Both a and h in problem 15 occur simultaneously. b. Both b and e in problem 15 occur simultaneously. c. Both d and g in problem 15 occur simultaneously. d. Both f and c in problem 15 occur simultaneously.

THE PARTS IN BOLD ARE MARKED AS THE PARTS NEEDED HELP. ATTACHED IS THE ENTIRE ASSIGNMENT FOR ONLY PURPOSE THAT ALL INFORMATION IS INCLUDED. IF YOU COULD PLEASE ONLY HELP WITH PART 15 AND 17. PE=? QE=? AND PART 17 SITUATIONS OCCURING SIMULTANEOUSLY! THANK YOU!

Consider the market for new, single-family homes in New Orleans. The general demand function for new housing in New Orleans is estimated to be

Qd =15-2P+0.05M+0.10R

where Qd is the monthly quantity demanded, P is the price per square foot, M is average monthly income in New Orleans, and R is the average monthly rent for a three-bedroom apartment in New Orleans. Qd is measured in units of 1,000 square feet per month.

New housing in New Orleans is a(n) __________________ (normal, inferior) good. How can you tell from the general demand function?

New housing and three-bedroom apartments are _________________ (substitutes, comple- ments) in New Orleans. How can you tell from the general demand function?

If average monthly income is $1,500 and the monthly rental rate for three-bedroom apart- ments is $700, then the demand function for new housing in New Orleans is

Qd = _____________________________________.

Graph the demand curve for new housing in New Orleans on the axes provided below. Label

the demand curve D0.

What happens to demand when the following changes occur?

a. b. c. d. e.

The price of the commodity rises.
Income decreases and the commodity is normal. Income decreases and the commodity is inferior.

The price of a complement good increases. The price of a substitute good decreases.

The general supply function for new housing in New Orleans is estimated to be Qs =96+2P-10PL -4PK

where P is the price per square foot of new housing in New Orleans, PL is the average hourly wage rate for construction workers, and PK is the price of capital (as measured by the average rate of interest paid on loans to home builders). Qs is measured in units of 1,000 square feet per month.

Does it make sense for PL and PK to have negative coefficients in the general supply func- tion? Explain why or why not.

If the average hourly wage rate for construction workers is $10 per hour and the average rate of interest on loans to builders is 9 percent (i.e., PK = 9), then the supply function for new housing is

Qs = ______________________.

Graph the supply curve for new housing in the graph below. Label supply S0.

Other things remaining the same, what would happen to the supply of a particular commodity if the following changes occur?

The price of the commodity increases.

Government regulators outlaw the use of a technology that enables the good to be

produced at a significantly lower cost.

The prices of inputs used to produce the commodity decrease.

The price of a commodity that is a substitute in production increases.

Managers expect the price of the good to fall in the near future.

As the cost of capital rises, firms in the industry stop purchasing plant and equip-

ment, which allows depreciation to diminish the productive capacity in the indus- try.

Solve mathematically for equilibrium price and quantity. Show your work:

PE = $__________ per square foot.
QE = __________ square feet per month (in 1,000s).

Do your supply and demand curves intersect at PE and QE found in question 8 above? Should they?

In equilibrium found in question 8, compute total consumer, producer, and social surpluses:

CS = $____________ PS = $____________ SS = $____________

13. Suppose New Orleans suffers a serious recession that causes average monthly income to fall from $1,500 to $1,100 per month. If other things remain the same, the demand for new hous- ing in New Orleans is now:

Qd = _______________________. Plot this new demand curve in the figure below. Label it D'.

Suppose that because of the recession in New Orleans, the wage rate for construction workers falls to $8 per hour. If other things remain the same, the supply of new housing in New Orle- ans is now:

Qs = _______________________.
Plot this new supply curve in the figure. Label the new supply curve S'.

After income falls to $1,100 and wages fall to $8, new equilibrium price and quantity are PE = $__________ per square foot
QE = __________ square feet per month (in 1,000s)

Determine the effect upon equilibrium price and quantity sold if the following events occur in a particular market:

The price of a substitute good (in consumption) decreases.

Consumersâ income increases and the good is inferior.

Government regulators decide to outlaw a cost-reducing technological

process in order to protect the environment.

The price of a complement good (in production) increases.

The price of inputs used to produce the good decrease.

Consumers expect that the price of the good will fall in the near future.

It is widely publicized that consumption of the good is helpful in prevent-

ing cancer.

The price of a substitute good (in production) decreases.

17. Suppose that a pair of events from problem 15 occur simultaneously. For each of the pairs of events indicated below, perform a qualitative analysis to predict the direction of change in either the equilibrium price or the equilibrium quantity. Explain why the change in one of these two variables is indeterminate.

Both a and h in problem 15 occur simultaneously.

Both b and e in problem 15 occur simultaneously.

Both d and g in problem 15 occur simultaneously.

Both f and c in problem 15 occur simultaneously.

TRUE / FALSE

1. True False In the aggregate expenditures model presented in the textbook,

investment is assumed to rise with increases in real GDP and fall with decreases in real GDP.

2. True False When C + I_g = GDP in a private closed economy, S = I_g and there are no unplanned changes in inventories.

3. True False The risk-free interest rate is the rate on long-term U.S. government bonds.

4. True False Bond prices and interest rates are directly or positively related.

5. True False The public debt is the accumulation of all deficits and surpluses that have occurred through time.

6. True False The M₂ money supply may be larger or smaller than the M₁ money supply depending on the size of small-denominated time deposit balances and Money Market Mutual Fund balances held by individuals.

7. True False Excess reserves are the amount by which required reserves exceed actual reserves.

8. True False The public debt is held as Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.

9. True False The equilibrium price level and equilibrium level of real GDP occur at the intersection of the aggregate demand curve and the aggregate supply curve.

10. True False Investment is highly stable; it increases over time at a very steady rate.

MULTIPLE CHOICE

11. A recessionary expenditure gap is:

A. the amount by which the full-employment GDP exceeds the level of aggregate expenditures.

B. the amount by which equilibrium GDP falls short of the full-employment GDP.

C. the amount by which investment exceeds saving at the full-employment GDP.

D. the amount by which aggregate expenditures exceed the full-employment level of GDP.

12. The multiplier effect indicates that:

A. a decline in the interest rate will cause a proportionately larger increase in investment.

B. a change in spending will change aggregate income by a larger amount.

C. a change in spending will increase aggregate income by the same amount.

D. an increase in total income will generate a larger change in aggregate expenditures.

13. Which one of the following is true about the U.S. Federal Reserve System?

There are 12 regional Federal Reserve Banks.

B. The head of the U.S. Treasury also chairs the Federal Reserve Board.

C. There are 14 members of the Federal Reserve Board.

D. The Open Market Committee is smaller in size than the Federal Reserve Board.

14. If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is:

A. 18 percent.

B. 24 percent.

C. 12 percent.

D. 6 percent.

15.

Refer to the above diagram for a private closed economy. The equilibrium level of GDP is:

A. $400.

B. $300.

C. $200.

D. $100.

16. Which of the following represents the most expansionary fiscal policy?

A. a $10 billion tax cut

B. a $10 billion increase in government spending

C. a $10 billion tax increase

D. a $10 billion decrease in government spending

17.

Refer to the above table. The economy shown is a:

A. private economy.

B. private open economy.

C. mixed closed economy.

D. mixed open economy.

18. Currency held in the vault of First National Bank is:

A. counted as part of M₁.

B. counted as part of M₂, but not M₁.

C. only counted as part of M₁ if it was deposited into a checking account.

D. not counted as part of the money supply.

19. If the dollar appreciates relative to foreign currencies, we would expect:

A. the multiplier to decrease.

B. the country's exports and imports to both fall.

C. the country's net exports to rise.

D. the country's net exports to fall.

20. The most important determinant of consumption and saving is the:

A. level of bank credit.

B. level of income.

C. interest rate.

D. price level.

21. The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to:

A. the reciprocal of the required reserve ratio.

B. 1 minus the required reserve ratio.

C. the reciprocal of the income velocity of money.

D. 1/MPS.

22. Which one of the following would not shift the aggregate demand curve?

A. a change in the price level

B. depreciation of the international value of the dollar

C. a decline in the interest rate at each possible price level

D. an increase in personal income tax rate

23. The cyclically-adjusted budget tells us:

A. that in a full-employment economy the Federal budget should be in balance.

B. that tax revenues should vary inversely with GDP.

C. what the size of the Federal budget deficit or surplus would be if the economy was at full

employment.

D. the actual budget deficit or surplus realized in any given year.

24. The aggregate supply curve:

A. is explained by the interest rate, real-balances, and foreign purchases effects.

B. gets steeper as the economy moves from the top of the curve to the bottom of the curve.

C. shows the various amounts of real output that businesses will produce at each price level.

D. is downsloping because real purchasing power increases as the price level falls.

25.

Refer to the above diagram. If the equilibrium price level is P₁, then:

A. aggregate demand is AD₂.

B. the equilibrium output level is Q₃.

C. the equilibrium output level is Q₂.

D. producers will supply output level Q₁

26. Discretionary fiscal policy refers to:

A. any change in government spending or taxes that destabilizes the economy.

B. the authority that the President has to change personal income tax rates.

C. intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

D. the changes in taxes and transfers that occur as GDP changes.

27.

Refer to the above diagram. Which tax system has the most built-in stability?

A. T₄

B. T₃

C. T₂

D. T₁

28.

Refer to the given graph. A shift of the consumption schedule from C₁ to C₂ might be caused by a(n):

A.	recession.

B.	wealth effect of an increase in stock market prices.

C.	increase in income tax rates.

D.	increase in saving.

29. When a bank loan is repaid the supply of money:

A. is constant, but its composition will have changed.

B. is decreased.

C. is increased.

D. may either increase or decrease.

30. The Federal budget deficit is found by:

A. subtracting government tax revenues plus government borrowing from government spending in a particular year.

B. subtracting government tax revenues from government spending in a particular year.

C. cumulating the differences between government spending and tax revenues over all years since the nation's founding.

D. subtracting government revenues from the noninvestment-type government spending in a particular year.

31.

Refer to the above information. Money supply M₁ for this economy is:

A. $ 60.

B. $ 70.

C. $ 130.

D. $ 140.

32. Which of the following statements is true as a result of Federal Reserve efforts to rescue the financial industry from the financial crisis of 2007 and 2008?

From February 2008, to May 2009, the Fed oversaw the consolidation of 20 major financial institutions into fewer than a dozen.

B. From March 2008, to February 2009, the Fed experienced a 50 percent decline in the value of assets held.

C. From February 2008, to March 2009, Fed assets more than doubled to nearly $2 trillion.

D. From February 2008, to March 2009, Fed lending caused the U.S. public debt to rise by over $1 trillion.

33. Which of the following is the basic economic policy function of the Federal Reserve Banks?

holding the deposits or reserves of commercial banks

B. acting as fiscal agents for the Federal government

C. controlling the supply of money

D. the collection or clearing of checks among commercial banks

34. In a fractional reserve banking system:

A. bank panics cannot occur.

B. the monetary system must be backed by gold.

C. banks can create money through the lending process.

D. the Federal Reserve has no control over the amount of money in circulation.

35.

Refer to the diagram that applies to a private closed economy. The APC is equal to 1 at income level:

36. Assume the Continental National Bank's balance statement is as follows:

Assuming a legal reserve ratio of 20 percent, how much in excess reserves would this bank have after a check for $10,000 was drawn and cleared against it?

A. $ 3,000

B. $ 24,000

C. $ 6,000

D. $ 16,000

37. Answer the question on the basis of the following table for a commercial bank or thrift:

Refer to the above table. When the legal reserve ratio is 25 percent, the excess reserves of this single bank are:

A. $0.

B. $1,000.

C. $5,000.

D. $30,000.

38. Which of the following is a tool of monetary policy?

A. open market operations

B. changes in banking laws

C. changes in tax rates

D. changes in government spending

39. An increase in nominal GDP increases the demand for money because:

A. interest rates will rise.

B. more money is needed to finance a larger volume of transactions.

C. bond prices will fall.

D. the opportunity cost of holding money will decline.

40. Answer the next question on the basis of the following table:

At equilibrium in the above market for money, the total amount of money demanded is:

A. $500.

B. $480.

C. $460.

D. $440.

41. For most financial assets investors must be compensated for:

A. non-diversifiable and diversifiable risk.

B. diversifiable risk and time preference.

C. non-diversifiable risk and time preference.

D. non-diversifiable and diversifiable risk, and time preference.

42. Reserves must be deposited in the Federal Reserve Banks by:

A. only commercial banks which are members of the Federal Reserve System.

B. all depository institutions, that is, all commercial banks and thrift institutions.

C. state chartered commercial banks only.

D. federally chartered commercial banks only.

43.

Refer to the diagrams. Assuming a constant price level, an increase in aggregate expenditures from AE₁to AE₂ would:

A.	move the economy from A to C along AD₁.

B.	move the economy from C to A along AD₁.

C.	increase aggregate demand from AD₁ to AD₂.

D.	decrease aggregate demand from AD₂ to AD₁.

44. The discount rate is the interest:

A. rate at which the central banks lend to the U.S. Treasury.

B. rate at which the Federal Reserve Banks lend to commercial banks.

C. yield on long-term government bonds.

D. rate at which commercial banks lend to the public.

45. What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments?

A. present value

B. future value

C. compound interest

D. real rate of interest

46. The aggregate demand curve:

A. is upsloping because a higher price level is necessary to make production profitable as production costs rise.

B. is downsloping because production costs decline as real output increases.

C. shows the amount of expenditures required to induce the production of each possible level of real output.

D. shows the amount of real output that will be purchased at each possible price level.

47. The Security Market Line depicts the relationship between the:

A. average expected rate of return on stocks and the average expected rate of return on bonds.

B. average expected rate of return of a financial asset and the discount rate.

C. risk level of a financial asset and the prime interest rate.

D. average expected rate of return and risk level of a financial asset.

48. Arbitrage causes all financial assets:

A. of the same risk level to have the same price.

B. to have the same expected rate of return.

C. to have the same beta.

D. of the same risk level to have the same average expected rate of return.

49.

Refer to the diagrams. The numbers in parentheses after the AD₁, AD₂, and AD₃ labels indicate the levels of investment spending associated with each curve. All figures are in billions. If the money supply is MS₁ and the goal of the monetary authorities is full-employment output Q_f, they should:

A.	increase the money supply from $80 to $100.

B.	increase the money supply from $80 to $120.

C.	maintain the money supply at $80.

D.	decrease the money supply from $80 to $60.

50. Given the expected rate of return on all possible investment opportunities in the economy:

A. an increase in the real rate of interest will reduce the level of investment.

B. a decrease in the real rate of interest will reduce the level of investment.

C. a change in the real interest rate will have no impact on the level of investment.

D. an increase in the real interest rate will increase the level of investment.

END OF THE EXAM

ECO102H1 Lecture Notes - Lecture 7: Normal Good, Aggregate Supply, Price Level

ECO102H1 Full Course Notes

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