If the price level and the money wage rate rise by the same percentage, there is no change in the quantity of real GDP supplied and a movement occurs up along the LAS curve.. If the pric
Trang 1A n s w e r s t o t h e
R e v i e w Q u i z z e s
Page 283 (page 691 in Economics)
1 If the price level and the money wage rate rise by the same percentage, what happens to the quantity of real GDP supplied? Along which aggregate supply curve does the economy move?
If the price level and the money wage rate rise by the same percentage, there is no change in the quantity of real GDP supplied and a movement occurs up along the
LAS curve.
2 If the price level rises and the money wage rate remains constant, what happens to the quantity of real GDP supplied? Along which aggregate supply curve does the economy move?
If the price level rises and the money wage rate remains constant the quantity of
real GDP supplied increases and the economy moves along the SAS curve.
3 If potential GDP increases, what happens to aggregate supply? Does the LAS curve shift or is there a movement along the LAS curve? Does the SAS curve shift or is there a movement along the SAS curve?
If potential GDP increases both long-run aggregate supply and short-run aggregate
supply increase and the LAS curve and SAS curve shift rightward.
4 If the money wage rate rises and potential GDP remains the same, does the
LAS curve or the SAS curve shift or is there a movement along the LAS curve
or the SAS curve?
If the money wage rate rises and potential GDP remains the same there is a
decrease in short-run aggregate supply and no change in long-run aggregate
supply The SAS curve shifts leftward and the LAS curve is unchanged.
Page 287 (page 695 in Economics)
1 What does the aggregate demand curve show? What factors change and what factors remain the same when there is a movement along the aggregate demand curve?
1 0
AGGREGATE SUPPLY AND AGGREGATE DEMAND**
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Trang 21 7 2
The aggregate demand curve shows the relationship between the quantity of real GDP demanded and the price level when other influences on expenditure plans remain the same When there is a movement along the aggregate demand curve, the price level changes and other factors such as expectations, fiscal and
monetary policy, and the world economy remain the same
2 Why does the aggregate demand curve slope downward?
The aggregate demand curve slopes downward because of the wealth effect and two substitution effects First, a rise in the price level decreases real wealth, which brings an increase in saving and a decrease in spending—the wealth effect
Second, a rise in the price level raises the interest rate, which decreases borrowing
and spending—an intertemporal substitution effect as people decrease current
spending in favor of future spending—and increases the price of domestic goods and services relative to foreign goods and services, which decreases exports and increases imports—an international substitution effect
3 How do changes in expectations, fiscal policy and monetary policy, and the world economy change aggregate demand and the aggregate demand
curve?
Aggregate demand increases and the AD curve shifts rightward if: expected future
income, expected future inflation, or expected future profits increase; government expenditure increases or taxes are cut; the quantity of money increases and the interest rate is cut; the exchange rate falls; or foreigners’ income increases The
reverse changes decrease aggregate demand and shift the AD curve leftward.
Page 293 (page 701 in Economics)
1 Does economic growth result from increases in aggregate demand, short-run aggregate supply, or long-run aggregate supply?
Economic growth results from increases in long-run aggregate supply Economic growth occurs because the quantity of labor increases, capital is accumulated and there are technological advances over time All three of these factors increase
potential GDP and shift the LAS curve rightward.
2 Does inflation result from increases in aggregate demand, short-run
aggregate supply, or long-run aggregate supply?
Inflation results from increases in aggregate demand that exceed the increase in long-run aggregate supply As the aggregate demand curve shifts rightward the
price level rises Increases in AD that exceed increases in LAS produce inflation.
3 Describe three types of short-run macroeconomic equilibrium
Short-run macroeconomic equilibrium occurs when the quantity of real GDP
demanded equals the quantity of real GDP supplied There are three types of short-run equilibrium: below full-employment equilibrium where a recessionary gap exists with real GDP less than potential GDP; above full-employment equilibrium where an inflationary gap exists with real GDP greater than potential GDP; full-employment equilibrium where no gap exists and real GDP equals potential GDP
4 How do fluctuations in aggregate demand and short-run aggregate supply bring fluctuations in real GDP around potential GDP?
Fluctuations in aggregate demand with no change in short-run aggregate supply bring fluctuations in real GDP around potential GDP For instance, starting from full employment, a decrease in aggregate demand decreases the price level and real GDP and creates a recessionary gap In the long run the money wage rate (and the money prices of other resources) falls so that short-run aggregate supply increases and the economy returns to its full employment equilibrium Starting from full employment, a decrease in short-run aggregate supply decreases real GDP and
172
Trang 3raises the price level The fall in real GDP combined with a rise in the price level is
a phenomenon called stagflation.
Page 295 (page 703 in Economics)
1 What are the defining features of classical macroeconomics and what policies
do classical macroeconomists recommend?
Classical macroeconomists believe that the economy is self-regulating and always
at full employment Classical macroeconomists assert that the proper government policy is to minimize the disincentive effects of taxes on employment, investment, and technological change
2 What are the defining features of Keynesian macroeconomics and what
policies do Keynesian macroeconomists recommend?
Keynesian macroeconomists believe that if the economy was left alone, it would rarely operate at full employment To achieve and maintain full employment the economy needs active help from fiscal and monetary policy Aggregate demand fluctuations combined with a very sticky money wage rate are the major sources of the business cycle Keynesian macroeconomists assert that active fiscal and monetary policy, designed to offset fluctuations in aggregate demand, are the proper government policies
3 What are the defining features of monetarist macroeconomics and what policies do monetarist macroeconomists recommend?
Monetarists believe that the economy is self-regulating and will typically operate at
full employment if monetary policy is not erratic and the money growth rate is kept
steady The major source of business cycle fluctuations are similar to the
Keynesian view, that is, changes in aggregate demand combined with a sticky money wage rate However, according to monetarists, the changes in aggregate demand are the result of fluctuations in the growth rate of money caused by the Federal Reserve Monetarists assert that the proper government policies are low taxes, to avoid the disincentive effects stressed by classical macroeconomists, and steady monetary growth
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Trang 4A n s w e r s t o t h e S t u d y P l a n P r o b l e m s a n d
A p p l i c a t i o n s
1 Explain the influence of each of the following events on the quantity of real GDP supplied and aggregate supply in India and use a graph to illustrate
• U.S firms move their call handling, IT, and data functions to India
Moving call-handling, IT, and data
functions to India increases short-run
and long-run aggregate supply because
it increases the amount of employment
at full employment and (probably) also
increases the capital stock As Figure
10.1 shows, both the short run aggregate
supply curve and long-run aggregate
supply curve shift rightward, from SAS0
to SAS1 and from LAS0 to LAS1
• Fuel prices rise
The rise in fuel prices raises firms’ costs
Short-run aggregate supply decreases
and the short-run aggregate supply
curve shifts leftward Long-run aggregate
supply does not change Figure 10.2
shows the leftward shift of the short-run
aggregate supply curve from SAS0 to
SAS1
• Wal-Mart and Starbucks open in India
When Starbucks and Wal-mart open in India, short-run and long-run aggregate supply increase When these stores open, employment at full employment
increases and India’s capital stock increases Both the short-run and long-run aggregate supply curves shift rightward, as illustrated in Figure 10.1
• Universities in India increase the number of engineering graduates
Increasing the number of engineering graduates increases India’s human capital Both the short-run and long-run aggregate supply increases, as shown in Figure
Trang 510.1 by the rightward shifts in the short-run and long-run aggregate supply curves.
• The money wage rate rises
An increase in the money wage rate increases firms’ costs Short-run aggregate
supply decreases but long-run aggregate supply does not change Long-run
aggregate supply does not change because in the long run the price level rises by the same percentage the money age rate increased, so in the long run
employment does not change This situation is illustrated in Figure 10.2, in which
the short-run aggregate supply curve shifts leftward and the long-run aggregate
supply curve does not change
• The price level in India increases
In the short run, an increase in the price
level increases the quantity of real GDP
supplied In the long run, the money
wage rate rises by the same percentage
so in the long run there is no change in
the quantity of real GDP supplied These
results are illustrated in Figure 10.3 by
the grey arrows showing the movement
along the short-run aggregate supply
curve, SAS, and the movement along the
long-run aggregate supply curve, LAS.
2 Labor productivity is rising at a rapid rate in China and wages are rising at a similar rate Explain how a rise in labor productivity and wages in China will
influence the quantity of real GDP supplied and aggregate supply in China
The rise in labor productivity increases potential GDP and increases aggregate
supply The short-run and long-run aggregate supply curves shift rightward The
rise in the money wage rate in China decreases short-run aggregate supply and
shifts the short-run aggregate supply curve leftward It has no effect on potential
GDP or on the long-run aggregate supply curve
3 Canada trades with the United States Explain the effect of each of the
following events on Canada’s aggregate demand
• The government of Canada cuts income taxes
Cutting income taxes increases aggregate demand because it increases people’s
disposable incomes
• The United States experiences strong economic growth
Strong growth in the United States increases U.S demand for Canadian exports
Canadian exports are a component of Canada’s aggregate demand so the increase
in demand for Canada’s exports means that Canada’s aggregate demand
increases
Trang 6• Canada sets new environmental standards that require power utilities to upgrade their production facilities
To upgrade their facilities, power utilities must increase their investment
Investment is a component of aggregate demand so an increase in investment means that Canada’s aggregate demand increases
4 The Fed cuts the quantity of money and all other things remain the same Explain the effect of the cut in the quantity of money on aggregate demand
in the short run
A decrease in the quantity of money decreases aggregate demand and shifts the
AD curve leftward By cutting the quantity of money, the interest rate rises, so
firms decrease their investment and households cut back their expenditure on new homes, new cars, and other big-ticket items The decrease in consumption
expenditure and investment both decrease aggregate demand
5 Gross Domestic Product for the Second Quarter of 2012
The increase in real GDP in the second quarter primarily reflected increases in personal consumption expenditures, exports, and investment Government spending decreased
Source: Bureau of Economic Analysis, August 29, 2012 Explain how the items in the news clip influence U.S aggregate demand The increase in consumption expenditures, exports, and investment all increase U.S aggregate demand The decrease in government spending decreases U.S aggregate demand
Use Figure 10.4 to work Problems 6 to 8
Initially, the short-run aggregate supply
curve is SAS0 and the aggregate demand
curve is AD0
6 Some events change aggregate
demand from AD0 to AD1 Describe two
events that could have created this
change in aggregate demand What is
the equilibrium after aggregate
demand changed? If potential GDP is
$1 trillion, the economy is at what the
type of macroeconomic equilibrium?
Aggregate demand increases when the
aggregate demand curve shifts from
AD0 to AD1 Aggregate demand
increases if expected future income,
expected future inflation, or expected
future profit increases; if the government cuts taxes, increases its expenditure on goods and services, or increases its transfer payments; if the Fed lowers the
interest rate; or if the U.S exchange rate falls or foreign income increases After
the change in aggregate demand, equilibrium is at point C: real GDP is $1.1 trillion
and the price level is 105 The economy is at an above full-employment
equilibrium with an inflationary gap
1 2 8 C H A P T E R 1 0
Trang 77 Some events change aggregate supply from SAS0 to SAS1 Describe two
events that could have created this change in aggregate supply What is the equilibrium after aggregate supply changed? If potential GDP is $1 trillion,
does the economy have an inflationary gap, a recessionary gap, or no output gap?
Aggregate supply decreases when the aggregate supply curve shifts from SAS0 to
SAS1 Aggregate supply decreases if potential GDP decreases; if the money wage rate rises; or if the money prices of other resources rise After the change,
equilibrium is at point A: real GDP is $0.9 trillion and the price level is 105 The
economy is at a below full-employment equilibrium with a recessionary gap
8 Some events change aggregate demand from AD0 to AD1 and aggregate
supply from SAS0 to SAS1 What is the new macroeconomic equilibrium?
After the changes, equilibrium is at point D: real GDP is $1.0 trillion and the price
level is 110 The economy is at a full-employment equilibrium
9 Describe the policy change that a classical macroeconomist, a Keynesian, and
a monetarist would recommend for U.S policymakers to adopt in response to each of the following events:
a Growth in the world economy slows
Classical economists probably would recommend no policy action If they
suggested any policy at all, the policy would involve cutting taxes Monetarist
economists would recommend an increase in the quantity of money, which lowers the interest rate Keynesian economists likely would suggest several policies, such
as the U.S government should increase aggregate demand by increasing its
expenditure on goods and services or by cutting taxes Keynesian economists also would suggest that the Fed should increase the quantity of money and lower
interest rates
b The world price of oil rises
Classical and monetarist economists probably would recommend no policy action
If they suggested any policy at all, the policy would involve cutting taxes
Keynesian economists likely would suggest several policies, such as the U.S
government should increase aggregate demand by increasing its expenditure on
goods and services or by cutting taxes Keynesian economists also would suggest that the Fed should increase the quantity of money and lower interest rates
c U.S labor productivity declines
Classical economists probably would recommend no policy action If they
suggested any policy at all, the policy would involve cutting taxes Monetarist
economists would recommend an increase in the quantity of money, which lowers the interest rate Keynesian economists likely would suggest several policies, such
as the U.S government should increase aggregate demand by increasing its
expenditure on goods and services or by cutting taxes Keynesian economists also would suggest that the Fed should increase the quantity of money and lower
interest rates
Trang 8Answers to Additional Problems and Applications
10 Explain for each event whether it changes the quantity of real GDP supplied, short-run aggregate supply, long-run aggregate supply, or a combination of them
• Hong Kong firms switch to lower-cost 3D printing technology
New technology raises productivity, which increases both short-run and long-run aggregate supply
• An ageing population is expected to shrink Hong Kong’s labor force
Shrinking labor force decreases short-run and long-run aggregate supply
• Foreign students in Hong Kong universities get temporary work permits Increase in labor force increases short-run and long-run aggregate supply
• Firms from mainland China open offices in Hong Kong
An increase in the quantity of capital increases short-run and long-run aggregate supply
• The Hong Kong price level rises
A rise in the price level might result from an increase in aggregate demand, which causes an increase in the quantity of real GDP supplied, or from a decrease in short-run aggregate supply, which causes a decrease in the quantity of real GDP demanded
11 Examine for each event whether it changes the quantity of real GDP
demanded or aggregate demand in Japan
• Japanese price level rises
A rise in the Japanese price level leads to a decrease in the quantity of real GDP demanded
• Depreciation of yen attracts more tourists to Japan
Exports of services increase which increases aggregate demand
• Japan’s coal consumption rises due to a prolonged shut down of nuclear plants
The increase in consumption expenditure increases aggregate demand
• Japan’s sales tax rises
Higher sales tax lowers consumption expenditure, which decreases aggregate demand
12 Changes in Inventory Investment
When real GDP increased in the first quarter of 2015, personal consumption expenditure, private inventory investment, and imports increased while
exports, nonresidential fixed investment, and government spending
decreased
Source: Bureau of Economic Analysis, April 29, 2015 Explain how the increase in private inventory investment affected U.S
aggregate demand
Private inventory investment is the change in value of firms’ stocks of unfinished
or finished but unsold goods It is a type of investment expenditure The increase in inventory investment increased aggregate demand
1 3 0 C H A P T E R 1 0
Trang 913 Exports and Imports Increase
Real exports of goods and services increased 6.0 percent in the second
quarter, compared with an increase of 4.4 percent in the first Real imports of goods and services increased 2.9 percent, compared with an increase of 3.1
percent
Source: Bureau of Economic Analysis, August 29, 2012 Explain how the changes in exports and imports reported here influence the
quantity of real GDP demanded and aggregate demand In which of the two
quarters reported did exports and imports make the greater contribution to
aggregate demand growth?
Net exports is part of aggregate demand, which means that an increase in net
exports increases aggregate demand Net exports equals exports minus imports,
so an increase in exports increases aggregate demand while an increase in
imports decreases aggregate demand In both quarters, exports increased so in
both quarters exports increased aggregate demand In both quarters, imports
increased, so in both quarters imports decreased aggregate demand The biggest contribution to economic growth was in the second quarter, because export growth rose significantly from 4.4 percent to 6.0 percent while import growth fell, from 3.1 percent to 2.9 percent
Use the following information to work Problems 14 to 16
According to the East Asia and Pacific Economic Update published by the World
Bank in April 2015, the following factors have affected China’s real GDP in
2015
• Global economic recovery supports a moderate increase in China’s exports
• China benefits from a fall in the world price of oil
• Chinese government to cut excess capacity in heavy industry
• U.S firms to relocate their labor-intensive manufacturing industries to
low-cost countries
14 Explain how each of the above factors changes short-run aggregate supply,
long-run aggregate supply, aggregate demand, or some combination of them The global economic recovery increases China’s exports, which increases
aggregate demand As the world price of oil is prone to fluctuations in the long run,
a fall in the world price of oil leads to an increase in short-run aggregate supply
The cut back in the excess capacity of production in heavy industry does not
change short-run aggregate supply and long-run aggregate supply As the excess capacity is reduced, the expected returns to new investment (in capacity) increase, leading to an increase in aggregate demand The relocation of labor-intensive
manufacturing industries from the U.S to low-cost countries such as China
increases production, increasing both the short-run aggregate supply and the long-run aggregate supply
15 Explain how each factor separately affect China’s real GDP and the price
level, starting from a position of long-run equilibrium
The increase in China’s exports raises the price level and increases real GDP The
fall in the world price of oil increases short-run aggregate supply, which decreases the price level and real GDP The reduction in excess capacity of production in
heavy industry does not change short-run aggregate supply and long-run
aggregate supply Due to an increase in expected returns from new investment,
aggregate demand increases, which raises the price level and increases real GDP The relocation of labor-intensive manufacturing industries to China increases
Trang 10short-run aggregate supply and long-run aggregate supply, which decreases the price level and increases real GDP
16 Explain the combined effects of these factors on China’s real GDP and the price level, starting from a position of long-run equilibrium
The combined effect is that real GDP increases but the effect on the price level is uncertain All factors (except global economic recovery which increases China’s exports) lower the price level The increase in China’s exports raises the price level
1 3 2 C H A P T E R 1 0