Deck 12: Aggregate Demand and Aggregate Supply

Question 1

What is the difference in the explanation of the shape of the aggregate demand curve and a single product demand curve? After all,both demand curves show an inverse relationship between price and quantity.

Answer 1

The aggregate demand curve shows an inverse relationship between the price level (the general level of all prices)and real GDP (the equilibrium level of real domestic output).The explanation of this inverse relationship is based on the real-balances effect,the interest-rate effect,and the foreign trade effect.In this case,as the price level rises,real GDP decreases.
The supply and demand model for a particular product shows an inverse relationship between the price of that product and the quantity of that product.The explanation for the inverse relationship between price and quantity in the demand for a single product is based on the substitution and income effects.The substitution effect is not applicable to the aggregate case because there is no substitute for all products in the economy.Also,the income effect is not applicable to the aggregate case because as the price level changes,nominal incomes also change.Therefore,lower price level does not necessarily produce higher real incomes.

Question 2

In the table below are aggregate demand and aggregate supply schedules.

Answer 2

(a)Suppose in Year 1,aggregate demand is shown in columns (1)and (2)in the above table and short-runaggregate supply is shown in columns (1)and (4)in the above table.What will be the equilibrium level of real GDP and the equilibrium price level?
(b)Suppose in Year 2,aggregate demand changes and is now shown in columns (1)and (3).What will be the new equilibrium level of real GDP and the new equilibrium price level?
(c)Suppose in Year 3,aggregate demand changes and is now shown again in columns (1)and (2).What will be the new level of real GDP and the new price level if prices and wages are completely flexible downward?
(d)Suppose in Year 3,aggregate demand changes and is now shown again in columns (1)and (2).What will be the new level of real GDP and the new price level if prices and wages are completely inflexible downward?
(a)Real GDP will be $1,700 and the price level will be 110.
(b)Real GDP will be $2,000 and the price level will be 120.
(c)Real GDP will be $1,700 and the price level will be 110.
(d)Real GDP will be $1,500 and the price level will be 120.

Question 3

What is the effect on the multiplier when an increase in aggregate demand also causes the price level to rise?

Answer 3

The multiplier effect is weakened with price level changes.An increase in aggregate demand causes the price level and real GDP to increase.However,the increase in real GDP is smaller than if the price level did not rise.The higher price level leads to the real-balances,interest-rate,and foreign trade effects,which reduce the impact of the increase in aggregate demand on real GDP.The conclusion is that the more the price level increases,the less effect any increase in aggregate demand will have in increasing real GDP.

Question 4

Suppose that a hypothetical economy has the following relationship between its real domestic output and the input quantities necessary for producing that level of output.

Question 5

How is the short-run aggregate supply curve sloped and why is it sloped this way?

Question 6

Suppose the aggregate demand and short-run aggregate supply schedules for a hypothetical economy are as shown below:

Question 7

List four government tax or spending policy options that would shift the short-run aggregate supply curve rightward.

Question 8

How is the long-run aggregate supply curve sloped? Explain.

Question 9

List three events that would shift the short-run aggregate supply curve leftward.

Question 10

Identify the ways in which each of the following determinants would have to change to cause a decrease in aggregate demand: consumer wealth,consumer expectations,business taxes,national income in countries abroad,exchange rates.

Question 11

What is the aggregate demand curve? What is the characteristic of its slope?

Question 12

Suppose the aggregate demand and short-run aggregate supply schedules for a hypothetical economy are as shown below:

Question 13

List the three major determinants that can cause a shift in the short-run aggregate supply.

Question 14

The determinants of aggregate demand "determine" the location of the aggregate demand curve.Explain the four basic determinants of aggregate demand.

Question 15

Describe the change in short-run aggregate supply that should result from each of the following changes in determinants.Assume that nothing else is changing besides the identified change.(Use "Decrease" or "Increase.")
(a)A rise in the average price of inputs;
(b)An increase in worker productivity;
(c)Government antipollution regulations become stricter;
(d)A new subsidy program is enacted for new business investment in productive equipment;
(e)Energy prices decline.

Question 16

In the below diagram assume that the aggregate demand curve shifts from AD₁ in year 1 to AD₂ in year 2,only to fall back to AD₁ in year 3.

Question 17

Economists think of three different aggregate supply curves based upon the time frame of observation.Briefly describe each.

Question 18

What determines the equilibrium price level and the level of real GDP in the aggregate demand-aggregate supply (short-run)model?

Question 19

Explain the three reasons given for the downward slope of the aggregate demand curve.

Question 20

How is the immediate short-run aggregate supply curve sloped? Explain.

Question 21

Using the aggregate demand-aggregate supply (short-run)model,explain how the depreciation of the Canadian dollar in terms of foreign currencies would affect the economy.

Question 22

Explain the relationship between the aggregate expenditures model in graph (A)below and the aggregate demand model in graph (B)below where aggregate demand is shifting.

Question 23

Differentiate between "demand-pull" and "cost-push" inflation using the aggregate demand-aggregate supply (short-run)model.

Question 24

Would increased downward price flexibility lead to less severe or more severe recessions? Explain.

Question 25

How can an economy already at full-employment expand without igniting inflation? Explain.

Question 26

Is the downward price inflexibility applicable to today's economy? Why or why not?

Question 27

Some economists argue that it is easier to resolve demand-pull inflation than cost-push inflation.Use the aggregate demand-aggregate supply (short-run)model to explain this assertion.

Question 28

Using the aggregate demand-aggregate supply (short-run)model,explain the impact of the public's expectations of severe inflation on real GDP and the price level.

Question 29

Explain the relationship between the aggregate expenditures model in graph (A)below and the aggregate demand model in graph (B)below.In other words,explain how points 1,2,and 3 are related to points 1',2',and 3'.

Question 30

Suppose an economic advisor to the Prime Minister recommended a personal income tax increase.Indicate the expected effects on aggregate demand and on short-run aggregate supply.

Question 31

Why does aggregate demand shift outward by a greater amount than the initial change in spending?

Question 32

Using the aggregate demand-aggregate supply (short-run)model,explain how a reduction in business taxes would affect the economy.

Question 33

How can the aggregate demand curve be derived from the aggregate expenditures model?

Question 34

What are five reasons for the downward price-level inflexibility,especially as it pertains to wages and prices?