Show that if the economy's aggregate supply curve is vertical, fluctuations in the growth of aggregate demand produce only fluctuations in inflation with no effect on output.
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- 1. Explain the factors that causes demand-pull inflation. 2. Explain the factors that causes cost-push inflation. 3. If consumer spending decreases due to a decrease in consumer confidence, which of the two (aggregate demand or aggregate supply) will be affected, and which direction (leftwards or rightwards) will it shift in the economy?9) Explain why inflation may tend to accelerate.10. Which of the following statements is true? a Cost-push inflation occurs as prices rise because of a rise in per-unit cost of production (unit cost = total cost/units of output). With cost-push inflation, prices rise but output falls. b Rising costs reduce profits and the amount of output firms are willing to supply at the current price level. As a result, the economy’s production of goods and services declines and the price level rises. c Supply shocks have been the major source of cost-push inflation. Supply shocks occur when there are dramatic increases in the price of raw materials or energy. d All of the above. e Only a) and b)
- 8. The economy begins in long-run equilibrium. Then one day, the president appoints a new chairman of the Federal Reserve. This new chairman is well-known for his view that inflation is not a major problem for an economy. a. How would this news affect the price level that people would expect to prevail? b. How would this change in the expected price level affect the nominal wage that workers and firms agree to in their new labor contracts? c. How would this change in the nominal wage affect the profitability of producing goods and services at any given price level? d. How does this change in profitability affect the short-run aggregate-supply curve? e. If aggregate demand is held constant, how does this shift in the aggregate-supply curve affect the price level and the quantity of out-put produced? f. Do you think this Fed chairman was a good appointment?2) Suppose that government decides to support the firms for their investments in research and the development. Assuming this support increases productivity in the economy, use aggregate demand and supply analysis to predict the short-run and long-run effects on inflation and output. Show these effects on a graph and explain the results in detail. 3) Why the slope of the aggregate supply curve differs in the short-run and in the long-run? Why the long- run aggregate supply curve is vertical and why the short-run supply curve is upward sloping? Explain in detail.Figure 8.3 Price Level Long run Aggregate Supply A B AS₁ AS2 AD1 AD2 Quantity of Output Long run Aggregate Supply = Potential GDP Refer to Figure 8.3 above. If the economy is at point A, which of the following would cause a change from AD1 to AD2? An increase in expected future inflation. ○ An increase in expected future profit. ○ A tax cut or an increase in either transfer payments. O An increase in the interest rate or a decrease in the quantity of money.
- 7. An unexpected outward shift of the economy's AD curve will cause real GDP growth to increase in: A) the short run only. B) the long run only. C) D) both the short run and the long run. neither the short run nor the long run. 8. An increase in expected inflation will cause the economy's aggregate demand curve to: A) shift outward. B) shift inward. C) become steeper. D) remain unchanged.4. Suppose that the President and Congress get legislation passed that encourages investment in research and development of new technologies. Assuming this policy results in a positive and permanent technological change, what does aggregate demand and supply analysis predict in terms of inflation and output? Only consider the self- correcting mechanism of the economy.12. Inflation The economy begins in long-run equilibrium. Then one day, the president appoints a new chair of the Federal Reserve. This new chair is well known for her view that inflation is not a major problem for an economy. Note: You will not be graded on any changes you make to the following graph, but you may use it to help you understand the scenario described. LRAS Aggregate Supply Aggregate Demand Aggregate Supply LRAS Aggregate Demand Quantity of Output Which of the following statements accurately describes what would happen as a result of this news? Check all that apply. O People would expect the price level to rise. O The nominal wage that workers and firms agree to in their new labor contracts would be higher than it would be otherwise. O The profitability of producing goods and services at any given price level would increase. O The short-run aggregate-supply curve would shift to the left. If aggregate demand is held constant, the shift in the aggregate-supply curve will…
- 24. Which of the following groups benefit from an unanticipated rise in the inflation rate ? O. homeowners with foxed - rate mortgages O. elderly people living on fixed incomes O. creditors or lenders O. workers on contracts without escalator claines 25. Suppose oil prices continue to rise , causing a supply shock . If the Fed increases interest rates , what would be the long run outcome ? O. The economy returns to long run equilibrium at a lower output but higher price level O. The economy returns to long run equilibrium at the original price level and output O. The economy returns to full employment but at a higher price level O. The economy returns to the original price level but at a lower output5. , Assume, while an economy is in long-run equilibrium, an adverse supply shock occured, such as energy prices have incrased. The central bank decides to accommodate this shock and restores the equilibrium quickly. What would be the effect of this policy action on inflation? Explain and illustrate with the help of an AD-AS diagram. 11) What effects might each of the following have on aggregate demand/aggregate supply? In each case use a diagram to illustrate the effect, explain why shifts occurred, and state the impact of each event on the price levels, the unemployment rate, and real GDP. a. Congress passes into law a $1.5 billion cut in personal income taxes. b. Significant technological advances in the renewable energy sector decrease the price of all electricity by 50% c. Increases in consumer confidence lead to a positive demand shock.