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Chapter 10: Q. 15 (page 229)

Explain how, if at all, each of the following events would affect equilibrium real GDP and the long run equilibrium price level.

a. A reduction in the quantity of money in circulation

b. An income tax rebate (the return of previously paid taxes) from the government to households, which they can apply only to purchases of goods and services

c. A technological improvement

d. A decrease in the value of the home currency in terms of the currencies of other nations

Short Answer

Expert verified

a. The equilibrium real GDP remains unchanged.

b. Thus, equilibrium real GDP remains unchanged

c.Thus, equilibrium real GDP increases.

d. Thus, the equilibrium real GDP remains unchanged.

Step by step solution

01

Unchanged (a)

a. Adiscount within the quantity of cash in circulation causes a leftward shiftwithin the aggregate demand along the long-run aggregate supply curve. This results into a fall in equilibrium price. So, the equilibrium real GDP remains unchanged.

02

Unchanged (b)

b. Antax rebate fromthe govt. to householdsresults in a rightward shiftwithin the aggregate demand curve along the long-run supply curve. As aresults of this, the equilibrium price rises, and thus, equilibrium real GDP remains unchanged.

03

Rightward (c)

c. A technological improvement causes a rightward shift within the long-run aggregate supply curve along the combination demand curve. This ends up in fall of equilibrium price. Thus, equilibrium real GDP increases.

04

Unchanged (d)

d. A decrease within the value of the house currency in terms of the currencies of other nations ends up in a rightward shift within the aggregate demand curve along the long-run aggregate supply curve. This results into the increase of equilibrium price, and thus, the equilibrium real GDP remains unchanged.

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Most popular questions from this chapter

This year, a nation's long-run equilibrium real GDP and price level both increased. Which of the following combinations of factors might simultaneously account for botb occurrences?

a. An isolated earthquake at the beginning of the year destroyed part of the nation's capital stock, and the nation's government significantly reduced its purchases of goods and services.

b. There was a technological improvement at the end of the previous year, and the quantity of money in circulation rose significantly during the year.

c. Labor productivity increased throughout the year, and consumers significantly increased their total planned purchases of goods and services.

d. The capital stock increased somewhat during the year, and the quantity of money in circular. tion declined considerably.

For each question, sщpose that the exonorm begins at the long-run equilibrium point Ain the diagram below. Identify which of the other points on the diagram-points B,C,D, or E-could represent a new long-run equilibrium after the described events take place and move the economy away from point A.

a. Significant productivity improvements occur, and the quantity of money in circulation increases.

b. No new capital investment takes place, and a fraction of the existing capital stock depreciates and becomes unusable. At the same time, the government imposes a large tax increase on the nation's households.

c. More efficient techniques for producing goods and services are adopted throughout the economy at the same time that the government reduces its spending on goods and services.

Take a look at the panel (a) of Figure 10-6. In the absence of a change in aggregate demand, what effect does economic growth have on the price level over time, other things being equal? Why?

Take a look at the panel (b) of Figure 10-6. If the Federal Reserve seeks to prevent secular deflation from taking place as a consequence of economic growth, how should it change the quantity of money in circulation? How would this policy action prevent secular deflation?

Suppose that there is a sudden rise in the price level. What will happen to economywide planned spending on purchases of goods and services? Why?
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