ECON 110 Connect Homework 6 Aggregate Supply and Demand Fiscal Policy Assignment solutions answers

ECON 110 Connect Homework 6 Aggregate Supply and Demand Fiscal Policy Assignment solutions complete answers 

 

Question 1

Use the graph to answer two questions.

 

Using the figure above, when AD shifts rightward, what happens to

a. the price level?

b. output?

 

Question 2

Illustrate the following events with AS or AD shifts:

 

a. Government cuts defense spending.

Instructions: Grab either the AD or AS curve and drag and drop it in a new position to represent the resulting shift in AD or AS. 

 

b. Interest rates rise.

 

c. Imported oil gets cheaper.

 

d. Taxes on the rich are increased.

 

e. Consumer confidence increases.

 

f. Taxes on consumers are cut.

 

g. Oil becomes much more expensive.

 

h. Interest rates fall.

 

Question 3

Illustrate the following events with AS or AD shifts:

a. Interest rates rise.

Instructions: Grab either the AD or AS curve and drag and drop it in a new position to represent the resulting shift in AD or AS.  

 

b. Imported oil gets cheaper.

 

c. Taxes on consumers are cut.

 

Question 4

Graph the following aggregate demand (AD) and aggregate supply (AS) curves and then answer five questions about output and the price level. 

 

The following schedule provides information with which to draw both an AD and AS curve. Both curves are assumed to be straight lines.

 

Instructions: Use the tools provided 'AD' and 'AS' to draw the aggregate demand and aggregate supply curves (plot 7 points per curve, 14 points total).

Average Price
Quantity Demanded
Quantity Supplied
(Dollars per Unit)
(Units per Year)
(Units per Year)
$800
100
700
700
200
600
600
300
500
500
400
400
400
500
300
300
600
200
200
700
100
 

a. At what price level does equilibrium occur?

b. What curve shifted if a new equilibrium occurs at an output level of 700 and a price level of $800?

c. What curve shifted if a new equilibrium occurs at an output level of 700 and a price level of $500?

d. What curve shifted if a new equilibrium occurs at an output level of 700 and a price level of $200?

e. Compared to the initial equilibrium (a), how have the outcomes in (b), (c), and (d) changed price levels and output?

 

Question 5

Suppose AS decreases by $50 billion for every 1 percentage point increase in business tax rates. By how much will AS decrease when the tax rate is raised from 10 percent to 22 percent?

 

Question 6

Use the figure to answer two questions.

 

Suppose the economy is at full employment when AS = AD2.

a. The GDP gap when the demand curve is at AD1 is

b. Would this mean the economy is in a recession or expansion?

 

Question 7

Suppose consumers' disposable income increased by $525 billion and their spending increased by $283 billion. What was the MPC?

Instructions: Round your response to two decimal places.

 

Question 8

The multiplier process depicted in the following table is based on an MPC of 0.75.

a. Recompute the first four cycles using an MPC of 0.98.

MPC = 0.75
MPC = 0.98
 
Spending Cycles
Change in Spending during Cycle
Cumulative Increase in Spending
Change in Spending during Cycle
Cumulative Increase in Spending
(Billions per year)
(Billions per year)
(Billions per year)
(Billions per year)
1
$100.00
$100.00
$100
 
2
75.00
175.00
 
 
3
56.25
231.25
 
 
4
42.18
273.44
 
 
 

Instructions:
Round your response to two decimal places.
b. Given that the MPC is higher, how much more consumption occurs in the first four cycles when the MPC = 0.98 compared to when the MPC = 0.75? 

c. What is the value of the multiplier

(i) if the MPC = 0.75? 

(ii) if the MPC = 0.98? 

 

Question 9

Suppose the government increases education spending by $30 billion. If the marginal propensity to consume is 0.75, how much will total spending increase?

Instructions: Enter your response as a whole number.

 

Question 10

Refer to the News Wire to answer two questions.

NEWS WIRE
FISCAL RESTRAINT
Retailers Bracing for Spending Slowdown

Retailers across the country are bracing for an anticipated slowdown in consumer spending. As of January 1, the Social Security payroll tax rate moved back up from 4.2 to 6.2 percent. That will reduce take-home pay by about 2 percent. That means that the 153 million workers in this country will have an average of $1,500 less to spend this year. For retailers, that implies less spending on groceries, household goods, and dining out. According to an estimate by Citigroup, the jump in the payroll tax will leave $110 billion less in consumers’ pockets. That has retailers worried.

If the MPC was 0.90, and using the Citigroup estimate,

a. how much did consumer spending decline initially in response to the 2013 payroll tax hike?

b. what was the ultimate decline in aggregate demand after all multiplier effects?