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Exam 12: Part A: Aggregate Demand and Aggregate Supply

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Question 21

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Describe and explain what is meant by the ratchet effect.

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A ratchet is a good analogy for the effe...

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Question 22

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

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Some possible answers are tax cuts or re...

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Question 23

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

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.

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.

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.

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

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

In the table below are aggregate demand and aggregate supply schedules. (a) Suppose in Year 1, aggregate demand is shown in columns (1) and (2) in the above table and short-run aggregate 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?

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

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.

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

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

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.

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