reduces spending on highway construction by Ghc10 billion. • Which way does the aggregate-demand curve shift? • Explain why the shift might be larger than Ghc10 billion. • Explain why the shift might be smaller than Ghc10 billion

reduces spending on highway construction by Ghc10 billion. • Which way does the aggregate-demand curve shift? • Explain why the shift might be larger than Ghc10 billion. • Explain why the shift might be smaller than Ghc10 billion

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter9: Aggregate Demand

Section: Chapter Questions

Problem 6.13P

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Why is the aggregate demand curve downsloping? Specify how your explanation differs from the explanation for the downsloping demand curve for a single product. What role does the multiplier play in shifts of the aggregate demand curve?
b. Using the model from this chapter, explain the effect on GDP from an increase in G by $5 billion. An increase in spending by $5 billion will add A. directly to Eisposable income by this amount and cause an increase in national income equal to less than $5 billion due to the multiplier effect. O B. directly to aggregate demand by this amount and lead to an eventual change in national income equal to $5 billion times the simple multiplier. O C. indirectly to aggregate demand and cause an eventual change in national income equal to $5 billion. OD. indirectly to disposable income, only a fraction of which (determined by the MPC) will then be spent, ie. national income will change by less than $5 billion.
5. Determine the effect of the following events would on the aggregate demand (AD) curve whether shifting AD to the right (R) or to the left (L). Then indicate reasons why relating to the question 3. Think graphically! (a) After a budget surplus, Congress moves to cut personal income taxes. This will shift AD to the ) because ( increase, decrease ) in consumer spending. (b) A boost in research and development by computer companies produces more powerful and efficient computers and equipment. This will shift AD to the ( ) because ( increase, decrease ) in spending. (c) Income rises in several countries that trade heavily with the U.S. This will shift AD to the ( ) because ( increase, decrease ) in spending. What if prices fall across several industries? Then AD curve will (shift outward, shift inward, not shift ). This is because prices ( are, are not ) a component of AD. Rather, a fall in prices will cause a movement ( upward, downward ) along the AD curve.
2. Consider an economy where aggregate demand AD consists of aggregate con- 1000 and government = sumption C 10+ 0.8Y, aggregate investment I spending G = 800. (a) = (c) (d) What is aggregate demand if aggregate income/output is 10,000? Why is the economy not in equilibrium in that state? Calculate the goods market equilibrium for this economy. (b) Assume that the government increases spending by 20%. Calculate the new goods market equilibrium. What is the multiplier for the change in government spending? Assume now that the country starts trading globally and has Exports and Imports. Assume that imports are given by Im = n Y, with n being the marginal propensity to import. (e) Explain why - with exports and imports - a increase in government spending (e.g., 20%) results in a smaller change in aggregate demand/income in equilibrium than without exports and imports. (You do not have to calculate the new equilibrium.)
1. Suppose that the U.S. government increases its expenditure on highways and bridges by $100 billion. Explain the effect that this expenditure would have on aggregate demand and real GDP.
$ Which of the following would cause the Aggregate Supply curve to move from AS to AS2 in the graph below? fs Price Level 150 140 130 120 110 100 90 80 70 60 % 5 0 16 5 O A general increase in energy and labor cost for businesses. O A federal government increase in spending. t 6 10 15 Real GDP ($ billion) -AS-AD-AS2 2 fa lyi & 7 7 J * 20 8 8 num lk ( 25 (1¹) 9
Suppose real GDP is $3,500, what of these is occuring? $4,000 Supply 45-degree line Planned aggregate spending, AEplanned (billions of dollars) AEPlanned 3,000 Demand 2,000 1,400 1,000 800 $500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Real GDP (billions of dollars) O Supply shortage. Exces supply. O Equilibrium. Excess demand.
Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy’s multiplier is 4. a. If household wealth falls by 5 percent because of declining house values, and the real interest rate falls by 3 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level?
8. Which of the following explain why the Aggregate Demand curve is downward sloping? a) An increase in the price level decreases the purchasing power of money denominated wealth, which in turn causes a decline in on consumption spending. b) An increase in the price level decreases the purchasing power of money, which means that more money is needed to purchase goods. This causes buyers of investment and durable goods to require bigger loans to finance their purchases. This, in turn, causes an increase in the demand for loanable funds which leads to a higher interest rate. A higher interest rate will reduce the real purchases of investment and durable goods. c) An increase in the price level makes goods relatively more expensive to foreigners causing them to buy less which means that net exports will decline. d) All of the above. e) None of the above. 9. Which of the following explain why the Aggregate Supply curve is upward sloping?…
19. Which of the following statements concerning Keynesian analysis are true? Select one: a. Keynes's analysis started with the recognition that the total quantity demanded of an economy's output was the sum of three types of spending: consumer expenditure, planned investment spending, and government spending. Ob. Keynes recognized that equilibrium would occur in the economy when planned expenditure equals Actual expenditure O c All of the above are true. d. Keynes's analysis involves explaining why aggregate output is at a certain level by understanding what factors affect each component of aggregate demand and how the sum of these components could add up to an output smaller or greater than the economy is capable of producing
Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy�s multiplier is 3. If household wealth falls by 6 percent because of declining house values, and the real interest rate falls by 2 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? The aggregate demand curve will shift_____ by $____ billion. In what direction and by how much will it eventually shift? The aggregate demand curve will shift_____ by $____ billion..
"The following chart indicates the aggregate demand (AD) and short-run aggregate supply (SRAS) schedules of decision- makers for the current period. Both buyers and sellers previ- ously anticipated that the price level during the current period would be P 105 a. Indicate the quantity of GDP that will be produced during this period. b. Will it be a long-run equilibrium level of GDP? Why or why not? c. What will the relationship between the actual and natural rates of unemployment be during the period? Explain 20 your answer.