AD and SRAS
Aggregate demand may be measured by adding up consumption, consumer spending, and these two other things.
What are government spending and net exports?
This is the shape of the long run aggregate supply curve.
What is vertical?
This would be the spending multiplier is the MPC was .75.
What is 4? (1/.25)
An economy is at full employment. Draw the short run affect of an increase in consumption taxes.
Graph should show a decrease of aggregate demand reflecting a lower price level and a decrease in real GDP.
This is the tax multiplier if the MPS is .1.
What is -9? (-MPC .9 / MPS .1) = -9
A decrease on corporate taxes would have this impact on short run aggregate supply. (Specify shift or move along and which direction)
What is SRAS would increase or shift to the right?
The LRAS and the PPC are functions of this measure of economic performance.
Multiple choice:Real GDP, Natural rate of unemployment, Unemployment rate, or Consumer price index. (CPI)
What is the natural rate of unemployment?
A country's MPS is .2 and the government decreases spending by $5 billion. This is the maximum change in real GDP. (Be sure to specify how much and if it increases or decreases)
What is a maximum decrease of $25 billion?
The full employment level of output in an economy is $150 billion and the current level of output is at $200 billion. Draw the short effect of an increase in interest rates.
Graph should show a positive output gap and then a left shift of aggregate demand. Price level would decrease and output would decrease.
A nation is in a positive output gap and the government takes no policy action. This is what would cause the economy to adjust back to full employment.
What is wages and input costs would adjust upwards and shift SRAS to the left?
Fill in the blanks. An increase in purchasing power occurs when the overall aggregate price level decreases. This concept is called the ____________ ____________ effect.
What is the real wealth effect?
Wages and input prices could be described as this in the long run.
What is flexible or fully adjusted to the price level?
A nation's government decreases taxes by $4 billion and has an MPC of .8. This would be the maximum change to real GDP. (Specify how much and increase or decrease)
What is an increase of $16 billion?
An economy is at short run equilibrium with a cyclical unemployment rate of 2%. Draw what happens in the short run if the government decreases taxes.
The graph should show a negative output gap and then a right shift of aggregate demand. Price level and output should increase.
An increase in aggregate demand would affect the price level, unemployment, and output in these ways. (Specify each increase or decrease)
What is price level would increase, unemployment would decrease, and output would increase?
In the short run, there is a trade off between these two economic concepts. (In this case, "trade off" means an inverse relationship)
What are inflation (prices) and unemployment?
This is how LRAS would be impacted by an increase in nominal wages for most workers.
What is LRAS would not change?
A nation's government increases transfer payments to households by $5 billion. The marginal propensity to consume (MPC) in the economy is 0.75. This would be the maximum change to real GDP. (Specify how much and increase or decrease)
What is an increase of $15 billion (Transfer multiplier = MPC (.75) / MPS (.25) = 3 x $5 billion
A nation currently has only frictional and structural unemployment. Show the long run impact of an increase in consumer spending.
The graph should start at full employment and then show a right shift of aggregate demand followed by a left shift of SRAS. Price level will increase and real GDP will return to equilibrium. (no change)
An economy has an unemployment rate of 5%. Show the effect of a shortage of electricity due to extended power outages.
The graph should show full employment and then reflect a left shift of SRAS. The price level would increase and real GDP would decrease.
This would be the effect on SRAS if consumers and producers expect higher price levels in the future. (Be specific about direction of shifts)
What is SRAS would decrease or shift to the left? (workers will demand higher wages and costs will increase)
These are the two shifters of the LRAS.
What are changes in resource quantity or quality and changes in technology?
A government increases spending on infrastructure by $6 billion and simultaneously decreases taxes by $4 billion. The MPC is 0.8. This would be the maximum change in real GDP resulting from these policies. (Specify the amount and whether GDP increases or decreases.)
What is an increase of $46 billion?
An economy has an unemployment rate of 7%. Show what would happen in the short run if there is a decrease in consumer spending.
A government decreases spending by $5 billion and increases taxes by $3 billion. The MPC is 0.6. This would be the maximum change in real GDP resulting from these policies. (Specify the amount and whether GDP increases or decreases)
What is decrease of $17 billion?