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Chapter 27: Problem 16

In each of the following cases, in the short run, determine whether the events cause a shift of a curve or a movement along a curve. Determine which curve is involved and the direction of the change. a. As a result of an increase in the value of the dollar in relation to other currencies, American producers now pay less in dollar terms for foreign steel, a major commodity used in production. b. An increase in the quantity of money by the Federal Reserve increases the quantity of money that people wish to lend, lowering interest rates. c. Greater union activity leads to higher nominal wages. d. A fall in the aggregate price level increases the purchasing power of households' and firms" money holdings. As a result, they borrow less and lend more.

Short Answer

Expert verified
Answer: The short-run aggregate supply (SRAS) curve shifts to the right, as the decrease in production costs allows firms to produce more goods at each price level.

Step by step solution

01

Identify the curve involved

The foreign steel's reduced cost for American producers will mainly affect the firms' production costs, thus involving the short-run aggregate supply (SRAS) curve.
02

Determine if it's a shift or movement along the curve

When the cost of production changes, it affects the entire SRAS curve, causing a shift rather than a movement along the curve.
03

Determine the direction of the change

The SRAS curve will shift to the right as the decrease in production costs allows firms to produce more goods at each price level. #b. Increase in quantity of money lowers interest rates#
04

Identify the curve involved

The change in interest rates due to an increase in the quantity of money will affect the money market, specifically the money supply (MS) curve.
05

Determine if it's a shift or movement along the curve

The increase in the quantity of money affects the MS curve, causing it to shift rather than resulting in a movement along the curve.
06

Determine the direction of the change

The MS curve will shift to the right, indicating an increase in money supply at each interest rate. This causes interest rates to decrease. #c. Greater union activity leads to higher nominal wages#
07

Identify the curve involved

Greater union activity leading to higher nominal wages will affect the production costs of firms, involving the short-run aggregate supply (SRAS) curve.
08

Determine if it's a shift or movement along the curve

An increase in nominal wages will affect the entire SRAS curve by raising production costs, causing a shift rather than a movement along the curve.
09

Determine the direction of the change

The SRAS curve will shift to the left, as higher wages lead to higher production costs, which result in lower output at each price level. #d. Fall in aggregate price level increases purchasing power and lending#
10

Identify the curve involved

A fall in the aggregate price level affects the purchasing power of households and firms, involving the investment (I) and consumption (C) curves.
11

Determine if it's a shift or movement along the curve

Since the purchasing power change affects the propensity to save and invest for all households and firms, it causes a shift in both the investment (I) and consumption (C) curves, rather than a movement along the curves.
12

Determine the direction of the change

The I and C curves will shift upwards (or to the right), showing that an increase in purchasing power leads to a higher propensity to consume and invest at each interest rate, hence more lending.

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Most popular questions from this chapter

Suppose that all households hold all their wealth in assets that automatically rise in value when the aggregate price level rises (an example of this is what is called an "inflation-indexed bond"-a bond whose interest rate, among other things, changes one-for-one with the inflation rate). What happens to the wealth effect of a change in the aggregate price level as a result of this allocation of assets? What happens to the slope of the aggregate demand curve? Will it still slope downward? Explain.

A fall in the value of the dollar against other currencies makes U.S. final goods and services cheaper to foreigners even though the U.S. aggregate price level stays the same. As a result, foreigners demand more American aggregate output. Your study partner says that this represents a movement down the aggregate demand curve because foreigners are demanding more in response to a lower price. You, however, insist that this represents a rightward shift of the aggregate demand curve. Who is right? Explain.

There were two major shocks to the U.S. economy in 2007, leading to the severe recession of \(2007-2009 .\) One shock was related to oil prices; the other was the slump in the housing market. This question analyzes the effect of these two shocks on GDP using the \(A D-A S\) framework. a. Draw typical aggregate demand and short-run aggregate supply curves. Label the horizontal axis "Real GDP" and the vertical axis "Aggregate price level." Label the equilibrium point \(E_{1}\), the equilibrium quantity \(Y_{1},\) and equilibrium price \(P_{1}\). b. Data taken from the Department of Energy indicate that the average price of crude oil in the world increased from \(\$ 54.63\) per barrel on January 5,2007 , to \(\$ 92.93\) on December 28,2007 . Would an increase in oil prices cause a demand shock or a supply shock? Redraw the diagram from part a to illustrate the effect of this shock by shifting the appropriate curve. c. The Housing Price Index, published by the Office of Federal Housing Enterprise Oversight, calculates that U.S. home prices fell by an average of \(3.0 \%\) in the 12 months between January 2007 and January 2008\. Would the fall in home prices cause a supply shock or demand shock? Redraw the diagram from part b to illustrate the effect of this shock by shifting the appropriate curve. Label the new equilibrium point \(E_{3}\), the equilibrium quantity \(Y_{3}\), and equilibrium price \(P_{3}\). d. Compare the equilibrium points \(E_{1}\) and \(E_{3}\) in your diagram for part \(c\). What was the effect of the two shocks on real GDP and the aggregate price level (increase, decrease, or indeterminate)?

The late 1990 s in the United States were characterized by substantial economic growth with low inflation; that is, real GDP increased with little, if any, increase in the aggregate price level. Explain this experience using aggregate demand and aggregate supply curves. Illustrate with a diagram.

Explain whether the following government policies affect the aggregate demand curve or the short-run aggregate supply curve and how. a. The government reduces the minimum nominal wage. b. The government increases Temporary Assistance to Needy Families (TANF) payments, government transfers to families with dependent children. c. To reduce the budget deficit, the government announces that households will pay much higher taxes beginning next year. d. The government reduces military spending.
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