Chapter 23, Aggregate Demand and Aggregate Supply Video Solutions, Essentials of Economics

Problem 1

Suppose the economy is in a long-run equilibrium.
a. Draw a diagram to illustrate the state of the economy. Be sure to show aggregate demand. short-run aggregate supply, and long-run aggregate supply.
b. Now suppose that a stock market crash causes aggregate demand to fall. Use your diagram to show what happens to output and the price level in the short run. What happens to the unemployment rate?
c. Use the sticky-wage theory of aggregate supply to explain what happens to output and the price level in the long run (assuming no change in policy). What role does the expected price level play in this adjustment? Be sure to illustrate your analysis in a graph.

Yi Chun Lin

Washington University in St Louis

02:57

Problem 2

Explain whether each of the following events increases, decreases, or has no effect on long-run aggregate supply.
a. The United States experiences a wave of immigration.
b. Congress raises the minimum wage to $\$ 15$ per hour.
c. Intel invents a new and more powerful computer chip.
d. A severe hurricane damages factories along the East Coast.

Jennifer Stoner

Numerade Educator

07:02

Problem 3

Suppose an economy is in long-run equilibrium.
a. Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium (call it point $A$ ). Be sure to include both short-run aggregate supply and long-run aggregate supply.
b. The central bank raises the money supply by 5 percent. Use your diagram to show what happens to output and the price level as the economy moves from the initial equilibrium to the new short-run equilibrium (call it point B).
c. Now show the new long-run equilibrium (call it point $C$ ). What causes the economy to move from point B to point C?
d. According to the sticky-wage theory of aggregate supply, how do nominal wages at point A compare with nominal wages at point B? How do nominal wages at point A compare with nominal wages at point $C ?$
e. According to the sticky-wage theory of aggregate supply, how do real wages at point A compare with real wages at point B? How do real wages at point A compare with real wages at point C?
f. Judging by the impact of the money supply on nominal and real wages, is this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run?

Yi Chun Lin

Washington University in St Louis

01:45

Problem 4

In 1939 , with the U.S. economy not yet fully recovered from the Great Depression. President Franklin Roosevelt proclaimed that Thanksgiving would fall a week earlier than usual so that the shopping period before Christmas would be longer. (The policy was dubbed "Franksgiving.') Explain what President Roosevelt might have been trying to achieve, using the model of aggregate demand and aggregate supply.

Prashant Bana

Numerade Educator

05:13

Problem 5

Explain why the following statements are false.
a. "The aggregate-demand curve slopes downward because it is the horizontal sum of the demand curves for individual goods."
b. The long-run aggregate-supply curve is vertical because economic forces do not affect long-run aggregate supply."
c. "If firms adjusted their prices every day, then the short-run aggregate-supply curve would be horizontal"
d. -Whenever the economy enters a recession, its long-run aggregate-supply curve shifts to the left."

Yi Chun Lin

Washington University in St Louis

05:28

Problem 6

For each of the three theories for the upward slope of the short-run aggregate-supply curve. carefully explain the following:
a. how the economy recovers from a recession and returns to its long-run equilibrium without any policy intervention
b. what determines the speed of that recovery

Oluwadamilola Ameobi

Numerade Educator

04:48

Problem 7

The economy begins in long-run equilibrium. Then one day, the president appoints a new Fed chair. This new chair is well known for her view that inflation is not a major problem for an economy.
a. How would this news affect the price level that people 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 would this change in profitability affect the short-run aggregate-supply curve?
e. If aggregate demand is held constant, how would this shift in the aggregate-supply curve affect the price level and the quantity of output produced?
f. Do you think appointing this Fed chair was a good decision?

Yi Chun Lin

Washington University in St Louis

04:20

Problem 8

Explain whether each of the following events shifts the short-run aggregate-supply curve, the aggregate-demand curve, both, or neither. For each event that does shift a curve, draw a diagram to illustrate the effect on the economy.
a. Households decide to save a larger share of their income.
b. Florida orange groves suffer a prolonged period of below-freezing temperatures.
c. Increased job opportunities overseas cause many people to leave the country.

Yi Chun Lin

Washington University in St Louis

04:36

Problem 9

For each of the following events, explain the short-run and long-run effects on output and the price level, assuming policymakers take no action.
a. The stock market declines sharply, reducing consumers' wealth.
b. The federal government increases spending on national defense.
c.A technological improvement raises productivity.
d. A recession overseas causes foreigners to buy fewer U.S. goods.

Yi Chun Lin

Washington University in St Louis

05:12

Problem 10

Suppose firms become optimistic about future business conditions and invest heavily in new
capital equipment.
a. Draw an aggregate-demand/aggregate-supply diagram to show the short-run effect of this optimism on the economy. Label the new levels of prices and real output. Explain in words why the aggregate quantity of output supplied changes.
b. Now use the diagram from part (a) to show the new long-run equilibrium of the economy. (For now, assume there is no change in the long-run aggregate-supply curve.) Explain in words why the aggregate quantity of output demanded changes between the short run and the long run.
c. How might the investment boom affect the long-run aggregate-supply curve? Explain.

Yi Chun Lin

Washington University in St Louis