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Chapter 23: Q 3. (page 617)

“The appreciation of the dollar from 2012 to 2017 had a negative effect on aggregate demand in the United States.” Is this statement true, false, or uncertain? Explain your answer.

Short Answer

Expert verified

The statement is true.

Step by step solution

01

Step 1. Define aggregate demand and aggregate supply.

Aggregate demand is defined as the total amount of demand produced in the economy for all finished goods and services.

Aggregate supply, often known as total production, is the total amount of products and services in a given economy over a certain time period at a given overall price.

02

Step 2. Is the given statement is true or false?

The claim is correct. According to the aggregate demand and supply analysis, an increase in the value of the US dollar reduces net exports and shifts the aggregate demand curve downward and to the left, lowering production.

When the value of the US dollar rises, US exports become less viable in the worldwide market. Exports are a component of aggregate demand, hence a reduction in exports affects total demand.

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Most popular questions from this chapter

Go to the St. Louis Federal Reserve FRED database, and find data on the personal consumption expenditure price index (PCECTPI), a measure of the price level; real compensation per hour (COMPRNFB); the nonfarm business sector real output per hour (OPHNFB), a measure of worker productivity; the price of a barrel of oil (MCOILWTICO); and the University of Michigan survey of inflation expectations (MICH). Use the frequency setting to convert the oil price and inflation expectations data series to "Quarterly," and

use the units setting to convert the price index to "Percent Change from Year Ago." Download all of the data into a spreadsheet, and convert the compensation and productivity measures to a single indicator. To do this, for each quarter, take the compensation number and subtract the productivity number. Call this difference "Net Wages Above Productivity."

a. Calculate the change in the inflation rate over the four most recent quarters of data available and the four quarters prior to that.

b. Calculate the changes in net wages above productivity, the price of oil, and inflation expectations over the four most recent quarters of data available and the four quarters prior to that.

c. Are your results consistent with what you would expect? How do your answers to part (b) help explain, if at all, your answer to part (a)? Explain using the short-run aggregate supply curve.

If the labor force becomes more productive over time, how would the long-run aggregate supply curve be affected?

What factors led to decreases in both the unemployment and inflation rates in the 1990s?

What factors shift the short-run aggregate supply curve? Do any of these factors shift the long-run aggregate supply curve? Why?

Suppose the president gets Congress to pass legislation that encourages investment in research and the development of new technologies. Assuming this policy leads: to a positive productivity change for the U.S. economy, use aggregate demand and supply analysis to predict the effects on inflation and output. Demonstrate these effects on a graph.
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