5. Macroeconomic equilibrium and the multiplier effectThe following graph shows a hypothetical economy in short-run equilibrium at an output level of $400 billion and a price level of 100. Suppose thatpotential GDP in this economy is $500 billion.Use the grey line (star symbol) to plot the long-run aggregate supply (LRAS) curve on the graph.PRICE LEVEL20017515012510075502500100200 300 400 500REAL GDP (Billions of dollars)ASAD600 700800ADASPotential GDP? Based on the graph, this economy is experiencingThe size of the of the gap is $Shift the aggregate demand (AD) curve to illustrate how potential output in this economy can be restored.Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps backto its original position, just drag it a little farther.To eliminate the GDP gap in this economy, the aggregate demand curve must shift to thebillion.by $billion at each price level.Suppose that each $100 increase in disposable income causes consumption spending in the economy to rise by $80. The economy's marginalpropensity to consume (MPC) is ▼, which means that the oversimplified multiplier for this economy is and the shift in the aggregatedemand curve required to restore the potential GDP level would occur if investment spendingby

AS-AD model: In this model we are given the aggregate demand curve which exhibits negative…

5. Macroeconomic equilibrium and the multiplier effect The following graph shows a hypothetical economy in short-run equilibrium at an output level of $400 billion and a price level of 100. Suppose that potential GDP in this economy is $500 billion. Use the grey line (star symbol) to plot the long-run aggregate supply (LRAS) curve on the graph. PRICE LEVEL 200 175 150 125 100 75 50 25 0 0 100 200 300 400 500 REAL GDP (Billions of dollars) AS AD 600 700 800 AD AS Potential GDP (?)

5. Macroeconomic equilibrium and the multiplier effect The following graph shows a hypothetical economy in short-run equilibrium at an output level of $400 billion and a price level of 100. Suppose that potential GDP in this economy is $500 billion. Use the grey line (star symbol) to plot the long-run aggregate supply (LRAS) curve on the graph. PRICE LEVEL 200 175 150 125 100 75 50 25 0 0 100 200 300 400 500 REAL GDP (Billions of dollars) AS AD 600 700 800 AD AS Potential GDP (?)

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter9: Aggregate Demand

Section: Chapter Questions

Problem 4.8P

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On a microeconomic demand curve, a decrease in price causes an increase in quantity demanded because the product in question is now relatively less expensive than substitute products. Explain why aggregate demand does not increase for the same reason in response to a decrease in the aggregate price level. In other words, what causes total spending to increase if it is not because goods are now cheaper?
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?…
4. What do we mean when we talk about the export base of a region? How does an increase in the export base affect total employment? How does this relate to the multiplier? What factors limit the size of the multiplier within cities?
1. Suppose that you want to write down a model to explain the observed relationship between aggregate income and aggregate economic spending. Suppose that you want to test other predictions of your model. You consider two such predictions. First, your model predicts that there is no relationship between income and temperature, but in the data there is a mild negative relationship. Second, your model predicts that consumption and income are negatively correlated, whereas they are positively correlated in the data. Which of these failures is problematic for your model and which is not? Why?
Match each definition to the appropriate component of aggregate demand. Definition The sum of the expenditures of business firms on new plant, equipment, and software and of households on new homes The goods and services purchased by all levels of government The total amount spent by consumers on newly produced goods and services The difference between exports and imports ⒸNet exports O Government spending Consumer Expenditure Which of the following components represents the largest piece of aggregate demand? O Consumer expenditure O Investment spending O Which of the following components represents the smallest piece of aggregate demand? O Consumer expenditure O Government spending O Investment spending ONet exports Investment Spending Government Spending Net Exports O O O O
3. Suppose an economy had aggregate demand components with the following relationships: Consumption Spending, C-140 +0.60*(DY) Investment Spending, I-25 +0.15"Y Government Spending, G-0 Net Export Spending, X=0 Tax Collections, Tx = 0 a. What is the equilibrium income for this economy (Show your work)? b. If the Government decided to Increase G spending by 6, what would be the new equilibrium income for this economy (Show your work)? Page 2 bed tooing c. If instead the Government decided to Reduce Tx (taxes) by 10 (i.e., send checks to people), what would be the new equilibrium income for this economy (Show your work)? d. If instead the Government decided to Increase G spending and Increase Tx (taxes) by 20, what would be the new equilibrium income for this economy (Show your work)?
9. Deriving aggregate demand from the income-expenditure model The following graph shows three planned expenditure lines for an economy at three different price levels. PE120 corresponds to the price level of 120; PE100 corresponds to the price level of 100; PE140 corresponds to the price level of 140. The black line (which starts in the bottom left corner) is a 45-degree line illustrating the set of points for which real income and planned expenditure are equal. 800 PE, (P = 100) 700 PE, (P =120) 600 PE, (P =140) Slope: 0.5 500 Y-Intercept: 200 400 300 100 100 200 300 400 500 600 700 800 REAL INCOME (Billions of dollars) The level of equilibrium output at a price level of 100, is On the following graph, plot the aggregate demand curve that results from varying the price level from 100 to 120 to 140, holding all else equal. Hint: Real income and the quantity of output are equivalent. For example, a real income of $100 billion is the same as a quantity of output of $100 billion. PLANNED…
6. Macroeconomic equilibrium and the ranges of the aggregate supply curve The following graph shows the aggregate demand (AD₁) and aggregate supply (AS) curves for a hypothetical economy with Natural Real GDP of $11 trillion. ? The Simple Keynesian Model AD₁ 130 125 120 115 110 105 100 95 90 8.0 8.5 9.0 11.5 12.0 9.5 10.0 10.5 11.0 REAL GDP (Trillions of dollars) Suppose consumers and businesses become less optimistic about future economic conditions, causing aggregate demand to decrease by a total $1.5 trillion at each price level (after all multiplier effects have taken place). On the previous graph, use the green line (triangle symbol) to show the new aggregate demand curve (AD2). Be sure that AD2 is parallel to AD₁ (you can mouse over AD₁ to see its slope). Then use the black drop lines (cross symbol) to indicate the new macroeconomic equilibrium after the shift of aggregate demand. range of the aggregate supply curve, causing the equilibrium price The decrease in aggregate demand…
5 The graph shows aggregate expenditures for the fictitious country of Carpistan. Suppose the government of Carpistan increases government expenditures in order to boost the economy. Move the appropriate curve or curves to show the effect of this increase. Next, place point A to show where actual aggregate expenditures equals planned aggregate expenditures. Aggregate Expenditures (AE) 10 9 5 0 1 3 4 D Real GDP (Y) 16 7 11 YAB AR 2.0 10
Question 41 The following equations describe the economy: C= 150 + 0.9Yd | = 150 G = 250 X 200 IM = 0.06Y T= 0.1Y At the equilibrium level of GDP, net exports are equal to a).-180 O b) - -20 Oc) 200 O d) 20 Next Page Previous Page Question 40 The following equations describe the economy: C = 150 + 0.9Y | = 150 G = 250 X 200 IM = 0.06Y T= 0.1Y In equilibrium GDP is equal to a) 3,000 b) 750 Oc) 3,750 O d) 7,500
1. State whether each of the following transactions is a part of aggregate demand in the United States, and if so whether it is Consumption spending, Investment, Government purchase, Exports, or IMPORTS For example, "Dieter, a German resident, buys frozen chickens that were raised in the U.S." Answer: No, IMPORTS a) David buys a keyboard synthesizer made in the United States. b) A Japanese automaker buys stock in an American auto company. c) A Japanese automaker builds an assembly plant in Illinois. d) Will buys a compact disc player made in Japan. e) The U.S government sends an insurance check to Renee, an unemployed keypunch operator. f) Mark buys a three-year-old used car. g) The state government sends a salary check to Karen, an economics instructor at CUNY.
1. The following are variables that may cause shifting of aggregate demand (AD) curve. Discuss the effect of increasing these variables to the aggregate demand. Use graphical approach to demonstrate the effect of increasing of each variable and explain why the AD curve shifted. a. Interest rate (domestic) b. Government expenditure (domestic)