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Chapter 12: Macroeconomics AD (page 239)
what is aggregate demand
total expenditure of households, firms, governments and spending on net exports
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Answer the following questions on the basis of the following three sets of data for the country of North Vaudeville:
| (A) | (B) | (C) | |||
| Price Level | Real GDP | Price Level | Real GDP | Price Level | Real GDP |
| 110 | 275 | 100 | 200 | 110 | 225 |
| 100 | 250 | 100 | 225 | 100 | 225 |
| 95 | 225 | 100 | 250 | 95 | 225 |
| 90 | 200 | 100 | 275 | 90 | 225 |
Which set of data illustrates aggregate supply in the immediate short-run in North Vaudeville? The short-run? The long run?
Assuming no change in hours of work, if real output per hour of work increases by 10 percent, what will be the new levels of real GDP in the right column of A? Do the new data reflect an increase in aggregate supply or do they indicate a decrease in aggregate supply?
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?
Why does a reduction in aggregate demand in the actual economy reduce real output, rather than the price level? Why might a full-strength multiplier apply to a decrease in aggregate demand?
Which of the following will shift the aggregate supply curve to the right?
A new networking technology increases productivity all over the economy.
The price of oil rises substantially.
Business taxes fall.
The government passes a law doubling all manufacturing wages.
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).
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