Economics

Michael Parkin

Chapter 27

Aggregate Supply and Aggregate Demand - all with Video Answers

Educators

Chapter Questions

Problem 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. Fuel prices rise. Wal-Mart and Starbucks open in India. Universities in India increase the number of engineering graduates. The money wage rate rises. The price level in India increases.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 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.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 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.The United States experiences strong economic growth. Canada sets new environmental standards that require power utilities to upgrade their production facilities.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 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.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 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.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 6

Use the following graph to work Problems 6 to 8 . Initially, the short-run aggregate supply curve is $S A S_{0}$ and the aggregate demand curve is $A D_{0}$
Some events change aggregate demand from $A D_{0}$ to $A D_{1} .$ 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 type of macroeconomic equilibrium?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 7

Use the following graph to work Problems 6 to 8 Initially, the short-run aggregate supply curve is $S A S_{0}$ and the aggregate demand curve is $A D_{0}$
Some events change aggregate supply from $S A S_{0}$ to $S A S_{1} .$ 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?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 8

Some events change aggregate demand from $A D_{0}$ to $A D_{1}$ and aggregate supply from $S A S_{0}$ to $S A S_{1}$. What is the new macroeconomic equilibrium?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 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.
b. The world price of oil rises.
c. U.S. labor productivity declines.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 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 $3 \mathrm{D}$ printing technology. An ageing population is expected to shrink Hong Kong's labor force. Foreign students in Hong Kong universities get temporary work permits.
Firms from mainland China open offices in Hong Kong. The Hong Kong price level rises.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 11

Examine for each event whether it changes the quantity of real GDP demanded or aggregate demand in Japan. Japanese price level rises. Depreciation of yen attracts more tourists to Japan. Japan's coal consumption rises due to a prolonged shut down of nuclear plants. Japan's sales tax rises.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 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.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 13

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?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 14

Use the following information to work Problems $14-16$ 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.
Explain how each of the above factors changes short-run aggregate supply, long-run aggregate supply, aggregate demand, or some combination of them.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 15

Use the following information to work Problems $14-16$ 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.
Explain how each factor separately affect China's real GDP and the price level, starting from a position of long-run equilibrium.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 16

Use the following information to work Problems $14-16$ 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.

Explain the combined effects of these factors on China's real GDP and the price level, starting from a position of long-run equilibrium.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 17

Use the following information to work Problems 17 and 18 In Japan, potential GDP is 600 trillion yen and the table shows the aggregate demand and short-run aggregate supply schedules.
$$\begin{array}{ccc}
\begin{array}{c}
\text { Real GDP } \\
\text { Price }
\end{array} & \begin{array}{c}
\text { Real GDP supplied } \\
\text { demanded }
\end{array} & \begin{array}{c}
\text { in the short run } \\
\text { (trillions of 2009 yen) }
\end{array} \\
\text { level } & 600 & 400 \\
\hline 75 & 550 & 450 \\
85 & 500 & 500 \\
95 & 450 & 550 \\
105 & 400 & 600 \\
115 & 350 & 650 \\
125 & 300 & 700
\end{array}$$
a. Draw a graph of the aggregate demand curve and the short-run aggregate supply curve.
b. What is the short-run equilibrium real GDP and price level?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 18

Use the following information to work Problems 17 and 18 In Japan, potential GDP is 600 trillion yen and the table shows the aggregate demand and short-run aggregate supply schedules.
$$\begin{array}{ccc}
\begin{array}{c}
\text { Real GDP } \\
\text { Price }
\end{array} & \begin{array}{c}
\text { Real GDP supplied } \\
\text { demanded }
\end{array} & \begin{array}{c}
\text { in the short run } \\
\text { (trillions of 2009 yen) }
\end{array} \\
\text { level } & 600 & 400 \\
\hline 75 & 550 & 450 \\
85 & 500 & 500 \\
95 & 450 & 550 \\
105 & 400 & 600 \\
115 & 350 & 650 \\
125 & 300 & 700
\end{array}$$
Does Japan have an inflationary gap or a recessionary gap and what is its magnitude?

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 19

Use the following news clip to work Problems 19 and 20 Spending by Women Jumps The magazine Women of China reported that Chinese women in big cities spent $63 \%$ of their income on consumer goods last year, up from $26 \%$ in $2007 .$ Clothing accounted for the biggest chunk of that spending, at nearly $30 \%$, followed by digital products such as cellphones $(11 \%)$ and travel $(10 \%)$ Chinese consumption as a whole grew faster than the overall economy and is expected to reach $42 \%$ of GDP by $2020,$ up from the current $36 \%$
Explain the effect of a rise in consumption expenditure on real GDP and the price level in the short run.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 20

Use the following news clip to work Problems 19 and 20 Spending by Women Jumps The magazine Women of China reported that Chinese women in big cities spent $63 \%$ of their income on consumer goods last year, up from $26 \%$ in $2007 .$ Clothing accounted for the biggest chunk of that spending, at nearly $30 \%$, followed by digital products such as cellphones $(11 \%)$ and travel $(10 \%)$ Chinese consumption as a whole grew faster than the overall economy and is expected to reach $42 \%$ of GDP by $2020,$ up from the current $36 \%$
If the economy had been operating at a fullemployment equilibrium,
a. Describe the macroeconomic equilibrium after the rise in consumer spending.
b. Explain and draw a graph to illustrate how the economy can adjust in the long run to restore a full-employment equilibrium.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 21

Suppose that the E.U. economy goes into an expansion. Explain the effect of the expansion on U.S. real GDP and unemployment in the short run.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 22

Explain why changes in consumer spending and business investment play a large role in the business cycle.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 23

How to Avoid Recession? Let the Fed Do Its Work Greg Mankiw wrote in 2007 on the eve of the Global Financial Crisis, "Congress made its most important contribution to taming the business cycle back in $1913,$ when it created the Federal Reserve System. Today, the Fed remains the first line of defense against recession." Source: The New York Times, December 23, 2007
a. Describe the process by which the Fed's action in times of recession flows through the economy.
b. Draw a graph to illustrate the Fed's action and its effect.

Brandon Miskanic

Brandon Miskanic

Numerade Educator

Problem 24

Cut Taxes and Boost Spending? Raise Taxes and Cut Spending? Cut Taxes and Cut Spending? This headline expresses three views about what to do to get the U.S. economy growing more rapidly and contribute to closing the recessionary gap. Economists from which macroeconomic school of thought would recommend pursuing policies described by each of these views?

Alex Loukas

Numerade Educator

Problem 25

After you have studied Economics in the News on
pp. $666-667,$ answer the following questions.
a. What are the main features of the U.S. economy in the second quarter of 2014 ?
b. Did the United States have a recessionary gap or an inflationary gap in 2014 ? How do you know?
c. Use the $A S-A D$ model to show the changes in aggregate demand and aggregate supply that occurred in 2013 and 2014 that brought the economy to its situation in mid- 2014
d. Use the $A S-A D$ model to show the changes in aggregate demand and aggregate supply that will have occurred when full employment is restored.
e. Use the $A S-A D$ model to show the changes in aggregate demand and aggregate supply that would occur if the federal government increased its expenditure on goods and services or cut taxes by enough to restore full employment. f. Use the $A S-A D$ model to show the changes in aggregate demand and aggregate supply that would occur if the economy moved into an inflationary gap. Show the short-run and the long-run effects.

Lindsay Bur

Numerade Educator

Problem 26

Brazil Falls into Recession A decade ago Brazil had rapid growth, but now its economy is experiencing a slowdown with investment falling and inventories increasing. Potential GDP growth rate has slowed. Business and consumer confidence has fallen. Source: BBC News, August 29, 2014
a. Explain the effect of a decrease in investment on real GDP and potential GDP.
b. Explain how business and consumer confidence influences aggregate expenditure.

Brandon Miskanic

Brandon Miskanic

Numerade Educator