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Chapter 12: Aggregate Demand Curve (page 239)
What shifts the aggregate demand curve?
changes in consumption, investments, government spending, and net export changes.
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What effects would each of the following have on aggregate demand or aggregate supply, other things equal? In each case, use a diagram to show the expected effects on the equilibrium price level and the level of real output, assuming that the price level is flexible both upward and downward.
A widespread fear by consumers of an impending economic depression.
A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output.
A reduction in interest rates.
A major increase in spending for health care by the federal government.
The general expectation of coming rapid inflation.
The complete disintegration of OPEC, causing oil prices to fall by one-half.
A 10 percent across-the-board reduction in personal income tax rates.
A sizable increase in labor productivity (with no change in nominal wages).
A 12 percent increase in nominal wages (with no change in productivity).
An increase in exports that exceeds an increase in imports (not due to tariffs).
True or False. Decreases in AD normally lead to decreases in both output and the price level.
Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve.
A vertical line.
The price level is fixed.
Output prices are flexible, but input prices are fixed.
A horizontal line.
An upsloping curve.
Output is fixed.
What were the monetary and fiscal policy responses to the Great Recession? What were some of the reasons suggested for why those policy responses didn’t seem to have as large an effect as anticipated on unemployment and GDP growth?
Suppose that the aggregate demand and aggregate supply schedules for a hypothetical economy are as shown in the following table.
| Amount of Real GDP Demanded, Billions | Price Level (Price Index) | Amount of Real GDP Supplied, Billions |
| \(100 | 300 | 450 |
| 200 | 250 | 400 |
| 300 | 200 | 300 |
| 400 | 150 | 200 |
| 500 | 100 | 100 |
a. Use the data above to graph the aggregate demand and aggregate supply curves. What are the equilibrium price level and the equilibrium level of real output in this hypothetical economy? Is the equilibrium real output also necessarily the full-employment real output?
b. If the price level in this economy is 150, will quantity demanded equal, exceed, or fall short of the quantity supplied? By what amount? If the price level is 250, will the quantity demanded equal, exceed, or fall short of the quantity supplied? By what amount?
c. Suppose that buyers desire to purchase \)200 billion of extra real output at each price level. Sketch in the new aggregate demand curve as AD1. What are the new equilibrium price level and level of real output?
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