ECON 214 Problem Set 6 solutions complete answers

ECON 214 Problem Set 6 solutions complete answers 

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Question 1

 

Determine whether the following changes cause short-run aggregate supply curve to shift to the right, shift to the left, or remain unchanged.

 

Part 1

 

The price level increases. The short-run aggregate supply curve will

 

Part 2

 

Input prices decrease. The short-run aggregate supply curve will

 

Part 3

 

Firms and workers expect the price level to fall. The short-run aggregate supply curve will

 

Part 4

 

The price level decreases. The short-run aggregate supply curve will

 

Part 5

 

New policies cause an increase in the cost of meeting government regulations. The short-run aggregate supply will

 

Part 6

 

The number of workers in the labor force increases. The short-run aggregate supply curve will

 

Question 2

 

The figure below depicts an unlabeled aggregate demand–aggregate supply model. Label the diagram with the items to the right of the diagram. Make sure you scroll down to see all the items that need labeling.

 

Question 3

 

From class and your textbook, you learned why the aggregate demand curve slopes downward, like the one shown below.

 

The next three questions ask you to explain why there is a negative relationship between the price level and real GDP.

 

Part 1

 

When the price level falls, household real wealth will        and consumption spending will       . Therefore, the quantity of aggregate demand will       .

 

Part 2

 

If the price level falls, people will save       , and the interest rate will       . Firms, therefore, will        investment spending.

 

Part 3

 

If the price level in the United States decreases relative to the price level in other countries, net exports will       , and the quantity of aggregate demand will       .

 

Question 4

 

Determine whether the following changes or events would shift the LRAS curve to the right, to the left, or not at all.

 

Question 5

 

Please read the article below, and use the information in the article to answer this question.

 

Storm Keeping Millions From Work May Slow Economic Growth by Jeff Kearns

 

Part 1

 

There is quite a bit of trade between Canada and the east coast of the United States. After Super Storm Sandy destroyed an immense amount of property along the U.S. eastern seaboard, firms in the area directed their own production toward the rebuilding effort, but they also greatly expanded their purchases from Canada to help with the rebuilding.

 

Consider the graph of Canada’s economy depicted below. Before the storm, the Canadian economy was at the intersection of the AD1 aggregate demand curve and the SRAS1 short-run aggregate supply curve, which is depicted by Point A. Suppose that for the remainder of this question, Sandy did not do any damage to Canada. This is an approximate characterization of the impact of the storm, because most of the damage that it inflicted was in the United States.

 

When the east coast of the United States starts rebuilding after the storm, the economy in Canada will be influenced in the following way.

 

will shift to the 

 

moving the Canadian economy to

 

Part 2

 

Once the Canadian economy reaches this point, the long-run aggregate supply curve will 

 

Part 3

 

Once all the storm damage has been repaired, Canada's aggregate demand curve will shift back to

 

and the economy will be operating, once again, at

 

Question 6

 

Part 1

 

The article mentions that the storm's timing was important. Sandy struck on a

 

so that workers were out of work for many days. If, instead, the storm had hit the coast on a weekend, people would have missed fewer work days.

 

Part 2

 

To show how the timing of the storm influences the economy, consider the graph below.

 

The graph depicts the economy before the storm. The economy was at the point marked in the graph, where aggregate demand was AD1, short-run aggregate supply was SRAS1, and long-run aggregate supply was LRAS1.

 

If Sandy had struck on a weekend, the short-run aggregate supply curve would shift to

 

and real GDP would be

 

Part 3

 

If Sandy struck on a Monday or Tuesday, the short-run aggregate supply curve would shift to

 

and real GDP would be

 

Question 7

 

Before tuberculosis was understood to be a communicable disease, and before the discovery of antibiotics to treat it, a major outbreak could kill or cripple a significant portion of a nation’s labor force. How would such an event affect the economy? Illustrate the effect by dragging to shift either the aggregate demand curve or the long-run aggregate supply curve. 

 

Question 8

 

Suppose an economy currently is at long-run equilibrium point E, with full-employment output (Y*) and price level P*. Given the changes in the economy listed to the right, illustrate the region where the new short-run equilibrium would be. Note that in each case, both the aggregate demand curve and the aggregate supply curve shift. Depending on the direction of the shift, you may not know what happens to either the price level or real GDP. Each case matches with one point.

 

Question 9

 

The table below provides data on real output, the unemployment rate, and the price level for 2016 and 2017. You want to explain what happened in the economy between 2016 and 2017. Assume that in 2016, the economy is at long-run equilibrium.

 

Assuming that either the aggregate demand curve or the aggregate supply curve shifted, the data is consistent with       .

 

Question 10

 

After the conclusion of the 1991 recession, the unemployment rate generally        throughout the 1990s.

 

An increase in        can help explain this change in unemployment and the positive growth in the 1990s.

 

Question 11

 

In the summer of 2008, global oil prices spiked to extremely high levels before coming down again at the end of that year. This temporary event had global effects because oil is an important resource in the production of many goods and services.

 

Part 1

 

Suppose that the graph below shows the U.S. economy in long-run equilibrium before the spike in oil prices.

 

Drag the appropriate part(s) of the graph to show the effect of the oil price increase in the short run. 

 

Part 2

 

Referring to the graph above, what happens in the economy in the short run?

 

Part 3

 

Now consider the long run. What happens when the economy returns to long-run equilibrium? Assume that there have been no policy changes in response to short-run events.

 

The price level is        it was before the oil price spike.

 

Output is       it was before the oil price spike.

 

Unemployment is        it was before the oil price spike.

 

Question 12

 

The OPEC oil embargo of 1973 (an event marked by a reduction in the production of oil, a reduction in oil exported to the United States, and an increase in oil prices in the United States) may have contributed to the        of 1973 and the        in real GDP caused by a(n)        in aggregate supply.

 

Question 13

 

For much of the 1990s, the U.S. economy was experiencing long-run economic growth, low unemployment, and a stable inflation rate. Which of the following would give rise to these outcomes?

 

Question 14

 

The U.S. Congress regularly enacts legislation that suspends or reduces import taxes for 2 or 3 years on certain imports, including raw materials and intermediate goods that are not made in the United States but that are vital for U.S. manufacturing. This legislation reduces the cost of U.S. manufacturing, causing a rightward shift of the short-run aggregate supply (SRAS) curve. This situation is depicted below in the movement of the economy from point A to point B. In the figure below, shift the appropriate curve to depict how the economy reacts in the long run, when all prices are flexible. You may assume that the shift of the SRAS curve does not have an impact on the long-run aggregate supply curve. 

 

Question 15

 

A change in government policy has increased the amount of unemployment benefits that the government pays to the unemployed. This increase in government expenditure has shifted the aggregate demand curve to the right. This situation is depicted below in the movement of the economy from point A to point B. In the figure below, shift the appropriate curve to depict how the economy reacts in the long run, when all prices are flexible. 

 

Question 16

 

The following figure depicts the aggregate demand (AD), the short-run aggregate supply (SRAS), and the long-run aggregate supply (LRAS) curves for an economy. The economy is initially at long-run equilibrium, at point A. Suppose that there is an increase in the amount of investment in the economy due to a reduction in the real interest rate. This increase in investment shifts the AD curve to the right, depicted below in the movement of the economy from point A to point B. Now, suppose that there is an unexpected increase in technological knowledge due to a breakthrough in artificial intelligence research. This change is initially reflected in a shift in the SRAS curve to the right, depicted below in the movement of the economy from point B to point C. In the figure below, shift the appropriate curve to depict how the economy reacts in the long run, when all prices are flexible. 

 

Question 17

 

Drag the appropriate curve to show the initial change to the short-run economy as a result of an extensive wildfire in California, using the aggregate demand and supply graph.

 

In the long run, all other things being equal, an extensive wildfire in California  will        U.S. output,        the U.S. price level, and        U.S. unemployement.

 

Question 18

 

Part 1

 

The graph below shows an economy in equilibrium.

 

Drag the appropriate part(s) of the graph to show the short-run effect of an increase in aggregate demand.

 

Part 2

 

Referring to the graph above, what happens after an increase in aggregate demand in the short run?