Problem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Problem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics"

Transcription

1 roblem Set #4: Aggregate Supply and Aggregate Demand Econ 100B: Intermediate Macroeconomics 1) Explain the differences between demand-pull inflation and cost-push inflation. Demand-pull inflation results from high aggregate demand: the increase in demand pulls prices and output up. Cost-push inflation comes from adverse supply shocks that push up the cost of production-for example, the increases in oil prices in the mid- and late-1970s. The hillips curve tells us that inflation depends on expected inflation, the difference between unemployment and its natural rate, and a shock v. The term β(u u n ) is the demand-pull inflation, since if unemployment is below its natural rate (u < u n ), inflation rises. The supply shock v is the cost-push inflation. 2) Why might inflation be inertial? Inflation is inertial because of the way people form expectations. It is plausible to assume that people s expectations of inflation depend on recently observed inflation. These expectations then influence the wages and prices that people set. For example, if prices have been rising quickly, people will expect them to continue to rise quickly. These expectations will be built into the contracts people set, so that actual wages and prices will rise quickly. In addition, both the hillips curve and the short-run aggregate supply curve show that inflation and unemployment move in opposite directions. 3) Assume the following model of the economy: Y = C + I + G C = (Y T ) I = r G = 50 and T = 40 ( ) d M = Y 20r M = 600 and = 2 a. Identify each of the variables and briefly explain their meaning. The variable Y represents real output or real income. From Chapter 2, we know that the value of the produced goods and services (real output) has to be equal to the value of the income earned in producing the goods and services (real income). The variable C represents the consumption of goods and services. The variable I represents investment by the firms. When firms purchase new capital goods, this counts as investment. When firms experience a change in their inventories, this also counts in the investment category of GD. The variable G represents the government s spending on newly produced goods and services. The variable T represents lump sum taxes, and Y T represents disposable income. The variable M represents the nominal money supply, is the price level, and M/ is the real money supply. The variable r is the real interest rate. The variable (M/ ) d represents real money demand. Consumption depends positively on disposable income, investment depends negatively on the real interest rate, and real money demand depends positively on real income and negatively on the real interest rate. b. Derive the equation for the IS curve, showing Y as a function of r alone. 1

2 The IS curve represents all combinations of the real interest rate r and real output Y such that the goods market is in equilibrium. The equation for the IS curve can be derived as follows: Y = C + I + G Y = ( (Y T )) + (100 10r) + 50 Y = ( (Y 40)) + (100 10r) + 50 Y = Y 10r 0.5Y = r Y = r c. Derive the equation for the LM curve, showing Y as a function of r alone. The LM curve represents all combinations of the real interest rate r and real output Y such that the money market is in equilibrium. The equation for the LM curve can be derived as follows: ( ) d ( ) M = M Y 20r = Y = r d. What are the equilibrium level of income and equilibrium interest rate? Y = 400, r = 5 e. Derive and graph an equation for the aggregate demand curve. What happens to this aggregate demand curve if fiscal or monetary policy changes? IS: Y = r or r = 25.05Y LM: Y = 600 ( ) + 20r s ( ) d M = M 600 = Y 20r (we need to keep in the equation) Y = r ) s AD: Y = ( 300 merge IS and LM using r Y = (25.05Y ) Y = Y 2Y = Y = An increase in decreases Y, so AD is downward slopping. Expansionary monetary or fiscal policy shift aggregate demand to the right. Contractionary monetary or fiscal policy shift aggregate demand to the left. 4) Suppose that an economy has the hillips curve A) What is the natural rate of unemployment? π t = π t 1.5(u.06) The natural rate of unemployment is the rate at which the inflation rate does not deviate from the expected inflation rate. Here, the expected inflation rate is just last period s actual inflation rate. Setting the inflation rate equal to last period s inflation rate, that is, π t = π t 1, we find that u = Thus, the natural rate of unemployment is 6 percent. 2

3 B) Graph the short-run and long-run relationships between inflation and unemployment. In the short run (that is, in a single period) the expected inflation rate is fixed at the level of inflation in the previous period, π t 1. Hence, the short-run relationship between inflation and unemployment is just the graph of the hillips curve: it has a slope of -0.5, and it passes through the point where π t = π t 1 and u = This is shown in Figure In the long run, expected inflation equals actual inflation, so that π t = π t 1, and output and unemployment equal their natural rates. The long-run hillips curve thus is vertical at an unemployment rate of 6 percent. C) How much cyclical unemployment is necessary to reduce inflation by 5 percentage points? Using Okun s law, compute the sacrifice ratio. To reduce inflation, the hillips curve tells us that unemployment must be above its natural rate of 6 percent for some period of time. We can write the hillips curve in the form π t π t 1 = 0.5(u0.06). Since we want inflation to fall by 5 percentage points, we want π t π t 1 = lugging this into the left-hand side of the above equation, we find 0.05 = 0.5(u 0.06). We can now solve this for u: u = Hence, we need 10 percentage points of cyclical unemployment above the natural rate of 6 percent. Okun s law says that a change of 1 percentage point in unemployment translates into a change of 2 percentage points in GD. Hence, an increase in unemployment of 10 percentage points corresponds to a fall in output of 20 percentage points. The sacrifice ratio is the percentage of a year s GD that must be forgone to reduce inflation by 1 percentage point. Dividing the 20 percentage-point decrease in GD by the 5 percentage-point decrease in inflation, we find that the sacrifice ratio is 20/5 = 4. D) Inflation is running at 10 percent. The Fed wants to reduce it to 5 percent. Give two scenarios that will achieve this goal. One scenario is to have very high unemployment for a short period of time. For example, we could have 16 percent unemployment for a single year. Alternatively, we could have a small amount of cyclical unemployment spread out over a long period of time. For example, we could have 8 percent unemployment for 5 years. Both of these plans would bring the inflation rate down from 10 percent to 5 percent, although at different speeds. 3

4 5) Suppose the economy is initially at a long-run equilibrium. Then the Fed increases the money supply. A) Assuming any resulting inflation was unexpected, explain changes in GD, unemployment, and inflation. Explain using three diagrams: IS-LM model, AD-AS model, and the hillips curve. Beginning in long-run equilibrium, where output is at the natural level, if the Federal Reserve increases the money supply, this will cause the economy to go through an expansionary phase. Starting with the ISLM model in Figure 14-2A, an increase in the money supply will shift the LM curve to the right, resulting in a lower interest rate and higher level of output at point B. In the long run, the price level will rise, real-money balances will decline, and the LM curve will shift back to its original position. There is no long-run change in the real interest rate or the level of output. Moving to the ADAS model in Figure 14-2B, an increase in the money supply will shift the AD curve to the right, resulting in a higher level of output and a higher price level at point B. In the long run, expected inflation will rise, shifting the SRAS curve upward. The economy ends up at point C with output back at its natural level and the price level at a higher level. Moving to the hillips curve graph in Figure 14-2C, the economy starts at point A, where unemployment is at the natural rate. The increase in the money supply pushes output above its natural level, and as a result, the unemployment rate falls below its natural level. This causes a movement along the short-run hillips curve to point B, where inflation is higher and unemployment is lower. In the long run, expected inflation will rise, causing the hillips curve to shift upward. The economy ends up at point C with higher inflation and no change in the unemployment rate. The economy moves through this expansionary cycle because the increase in the money supply does not immediately cause expected inflation to rise. 4

5 5

6 B) Assuming instead that any resulting inflation is expected, explain any changes in GD, unemployment, and inflation. Explain using three diagrams: IS LM model, AD AS model, and the hillips curve. Beginning in long-run equilibrium with output at its natural level, if the Federal Reserve increases the money supply and people immediately expect inflation to rise, then nothing changes except for the price level and the inflation rate. In the ISLM model, the increase in the money supply will cause the price level to rise at the same rate as the money supply such that there is no change in real balances. The economy stays at point A, as illustrated in Figure 14-3A. Moving to the ADAS model, the increase in the money supply shifts the AD curve to the right, but at the same time, the increase in expected inflation shifts the SRAS curve up and to the left. The economy remains at the natural level of output and the price level is higher, as illustrated in Figure 14-3B. Moving to the hillips curve, the immediate increase in expected inflation shifts the short-run hillips curve upward, causing the inflation rate to rise with no change in the unemployment rate, as illustrated in Figure 14-3C. When the money supply increases and the public immediately expects higher inflation, the economy does not move through an expansionary cycle. 6

7 7

Chapter 12: Aggregate Supply and Phillips Curve

Chapter 12: Aggregate Supply and Phillips Curve Chapter 12: Aggregate Supply and Phillips Curve In this chapter we explain the position and slope of the short run aggregate supply (SRAS) curve. SRAS curve can also be relabeled as Phillips curve. A basic

More information

Practiced Questions. Chapter 20

Practiced Questions. Chapter 20 Practiced Questions Chapter 20 1. The model of aggregate demand and aggregate supply a. is different from the model of supply and demand for a particular market, in that we cannot focus on the substitution

More information

BADM 527, Fall 2013. Midterm Exam 2. Multiple Choice: 3 points each. Answer the questions on the separate bubble sheet. NAME

BADM 527, Fall 2013. Midterm Exam 2. Multiple Choice: 3 points each. Answer the questions on the separate bubble sheet. NAME BADM 527, Fall 2013 Name: Midterm Exam 2 November 7, 2013 Multiple Choice: 3 points each. Answer the questions on the separate bubble sheet. NAME 1. According to classical theory, national income (Real

More information

Chapter 9. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis. 2008 Pearson Addison-Wesley. All rights reserved

Chapter 9. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis. 2008 Pearson Addison-Wesley. All rights reserved Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Chapter Outline The FE Line: Equilibrium in the Labor Market The IS Curve: Equilibrium in the Goods Market The LM Curve:

More information

In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks.

In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks. Chapter 11: Applying IS-LM Model In this chapter we learn the potential causes of fluctuations in national income. We focus on demand shocks other than supply shocks. We also learn how the IS-LM model

More information

Agenda. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, Part 3. Disequilibrium in the AD-AS model

Agenda. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, Part 3. Disequilibrium in the AD-AS model Agenda The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis, art 3 rice Adjustment and the Attainment of General Equilibrium 13-1 13-2 General equilibrium in the AD-AS model Disequilibrium

More information

Pre-Test Chapter 15 ed17

Pre-Test Chapter 15 ed17 Pre-Test Chapter 15 ed17 Multiple Choice Questions 1. The extended AD-AS model: A. distinguishes between short-run and long-run aggregate demand. B. explains inflation but not recession. C. includes G

More information

Ch.6 Aggregate Supply, Wages, Prices, and Unemployment

Ch.6 Aggregate Supply, Wages, Prices, and Unemployment 1 Econ 302 Intermediate Macroeconomics Chul-Woo Kwon Ch.6 Aggregate Supply, Wages, rices, and Unemployment I. Introduction A. The dynamic changes of and the price adjustment B. Link between the price change

More information

1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand for money.

1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand for money. Macroeconomics ECON 2204 Prof. Murphy Problem Set 4 Answers Chapter 10 #1, 2, and 3 (on pages 308-309) 1. a. Interest-bearing checking accounts make holding money more attractive. This increases the demand

More information

For a closed economy, the national income identity is written as Y = F (K; L)

For a closed economy, the national income identity is written as Y = F (K; L) A CLOSED ECONOMY IN THE LONG (MEDIUM) RUN For a closed economy, the national income identity is written as Y = C(Y T ) + I(r) + G the left hand side of the equation is the total supply of goods and services

More information

Econ 102 Aggregate Supply and Demand

Econ 102 Aggregate Supply and Demand Econ 102 ggregate Supply and Demand 1. s on previous homework assignments, turn in a news article together with your summary and explanation of why it is relevant to this week s topic, ggregate Supply

More information

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3 Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3 1. When firms experience unplanned inventory accumulation, they typically: A) build new plants. B) lay off workers and reduce

More information

CH 10 - REVIEW QUESTIONS

CH 10 - REVIEW QUESTIONS CH 10 - REVIEW QUESTIONS 1. The short-run aggregate supply curve is horizontal at: A) a level of output determined by aggregate demand. B) the natural level of output. C) the level of output at which the

More information

Chapter 13. Aggregate Demand and Aggregate Supply Analysis

Chapter 13. Aggregate Demand and Aggregate Supply Analysis Chapter 13. Aggregate Demand and Aggregate Supply Analysis Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics In the short run, real GDP and

More information

12.1 Introduction. 12.2 The MP Curve: Monetary Policy and the Interest Rates 1/24/2013. Monetary Policy and the Phillips Curve

12.1 Introduction. 12.2 The MP Curve: Monetary Policy and the Interest Rates 1/24/2013. Monetary Policy and the Phillips Curve Chapter 12 Monetary Policy and the Phillips Curve By Charles I. Jones Media Slides Created By Dave Brown Penn State University The short-run model summary: Through the MP curve the nominal interest rate

More information

ECON 3312 Macroeconomics Exam 3 Fall 2014. Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

ECON 3312 Macroeconomics Exam 3 Fall 2014. Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ECON 3312 Macroeconomics Exam 3 Fall 2014 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Everything else held constant, an increase in net

More information

Problem Set 5. a) In what sense is money neutral? Why is monetary policy useful if money is neutral?

Problem Set 5. a) In what sense is money neutral? Why is monetary policy useful if money is neutral? 1 Problem Set 5 Question 2 a) In what sense is money neutral? Why is monetary policy useful if money is neutral? In Problem Set 4, Question 2-Part (e), we already analysed the effect of an expansionary

More information

Inflation and Unemployment CHAPTER 22 THE SHORT-RUN TRADE-OFF 0

Inflation and Unemployment CHAPTER 22 THE SHORT-RUN TRADE-OFF 0 22 The Short-Run Trade-off Between Inflation and Unemployment CHAPTER 22 THE SHORT-RUN TRADE-OFF 0 In this chapter, look for the answers to these questions: How are inflation and unemployment related in

More information

Aggregate Demand and Aggregate Supply Ing. Mansoor Maitah Ph.D. et Ph.D.

Aggregate Demand and Aggregate Supply Ing. Mansoor Maitah Ph.D. et Ph.D. Aggregate Demand and Aggregate Supply Ing. Mansoor Maitah Ph.D. et Ph.D. Aggregate Demand and Aggregate Supply Economic fluctuations, also called business cycles, are movements of GDP away from potential

More information

The Aggregate Demand- Aggregate Supply (AD-AS) Model

The Aggregate Demand- Aggregate Supply (AD-AS) Model The AD-AS Model The Aggregate Demand- Aggregate Supply (AD-AS) Model Chapter 9 The AD-AS Model addresses two deficiencies of the AE Model: No explicit modeling of aggregate supply. Fixed price level. 2

More information

Extra Problems #3. ECON 410.502 Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma. Notice:

Extra Problems #3. ECON 410.502 Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma. Notice: ECON 410.502 Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma Extra Problems #3 Notice: (1) There are 25 multiple-choice problems covering Chapter 6, 9, 10, 11. These problems are not homework and

More information

THE OPEN AGGREGATE DEMAND AGGREGATE SUPPLY MODEL.

THE OPEN AGGREGATE DEMAND AGGREGATE SUPPLY MODEL. THE OPEN AGGREGATE DEMAND AGGREGATE SUPPLY MODEL. Introduction. This model represents the workings of the economy as the interaction between two curves: - The AD curve, showing the relationship between

More information

Chapter 12 Unemployment and Inflation

Chapter 12 Unemployment and Inflation Chapter 12 Unemployment and Inflation Multiple Choice Questions 1. The origin of the idea of a trade-off between inflation and unemployment was a 1958 article by (a) A.W. Phillips. (b) Edmund Phelps. (c)

More information

Answer: C Learning Objective: Money supply Level of Learning: Knowledge Type: Word Problem Source: Unique

Answer: C Learning Objective: Money supply Level of Learning: Knowledge Type: Word Problem Source: Unique 1.The aggregate demand curve shows the relationship between inflation and: A) the nominal interest rate. D) the exchange rate. B) the real interest rate. E) short-run equilibrium output. C) the unemployment

More information

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How

More information

I d ( r; MPK f, τ) Y < C d +I d +G

I d ( r; MPK f, τ) Y < C d +I d +G 1. Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the

More information

I. Introduction to Aggregate Demand/Aggregate Supply Model

I. Introduction to Aggregate Demand/Aggregate Supply Model University of California-Davis Economics 1B-Intro to Macro Handout 8 TA: Jason Lee Email: jawlee@ucdavis.edu I. Introduction to Aggregate Demand/Aggregate Supply Model In this chapter we develop a model

More information

Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5

Econ 202 Final Exam. Table 3-1 Labor Hours Needed to Make 1 Pound of: Meat Potatoes Farmer 8 2 Rancher 4 5 Econ 202 Final Exam 1. If inflation expectations rise, the short-run Phillips curve shifts a. right, so that at any inflation rate unemployment is higher. b. left, so that at any inflation rate unemployment

More information

1) Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases:

1) Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases: 1) Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases: a) If investment does not depend on the interest rate, the IS curve

More information

Pre-Test Chapter 10 ed17

Pre-Test Chapter 10 ed17 Pre-Test Chapter 10 ed17 Multiple Choice Questions 1. Refer to the above diagrams. Assuming a constant price level, an increase in aggregate expenditures from AE 1 to AE 2 would: A. move the economy from

More information

THREE KEY FACTS ABOUT ECONOMIC FLUCTUATIONS

THREE KEY FACTS ABOUT ECONOMIC FLUCTUATIONS 15 In this chapter, look for the answers to these questions: What are economic fluctuations? What are their characteristics? How does the model of demand and explain economic fluctuations? Why does the

More information

Long run v.s. short run. Introduction. Aggregate Demand and Aggregate Supply. In this chapter, look for the answers to these questions:

Long run v.s. short run. Introduction. Aggregate Demand and Aggregate Supply. In this chapter, look for the answers to these questions: 33 Aggregate Demand and Aggregate Supply R I N C I L E S O F ECONOMICS FOURTH EDITION N. GREGOR MANKIW Long run v.s. short run Long run growth: what determines long-run output (and the related employment

More information

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

More information

Agenda. Business Cycles. What Is a Business Cycle? What Is a Business Cycle? What is a Business Cycle? Business Cycle Facts.

Agenda. Business Cycles. What Is a Business Cycle? What Is a Business Cycle? What is a Business Cycle? Business Cycle Facts. Agenda What is a Business Cycle? Business Cycles.. 11-1 11-2 Business cycles are the short-run fluctuations in aggregate economic activity around its long-run growth path. Y Time 11-3 11-4 1 Components

More information

Factors that Shift the IS Curve

Factors that Shift the IS Curve Factors that Shift the IS Curve A change in autonomous factors that is unrelated to the interest rate Changes in autonomous consumer expenditure Changes in planned investment spending unrelated to the

More information

Answers to Text Questions and Problems in Chapter 11

Answers to Text Questions and Problems in Chapter 11 Answers to Text Questions and Problems in Chapter 11 Answers to Review Questions 1. The aggregate demand curve relates aggregate demand (equal to short-run equilibrium output) to inflation. As inflation

More information

1. Explain what causes the liquidity preference money (LM) curve to shift and why.

1. Explain what causes the liquidity preference money (LM) curve to shift and why. Chapter 22. IS-LM in Action C H A P T E R O B J E C T I V E S By the end of this chapter, students should be able to: 1. Explain what causes the liquidity preference money (LM) curve to shift and why.

More information

2.If actual investment is greater than planned investment, inventories increase more than planned. TRUE.

2.If actual investment is greater than planned investment, inventories increase more than planned. TRUE. Macro final exam study guide True/False questions - Solutions Case, Fair, Oster Chapter 8 Aggregate Expenditure and Equilibrium Output 1.Firms react to unplanned inventory investment by reducing output.

More information

4 Macroeconomics LESSON 6

4 Macroeconomics LESSON 6 4 Macroeconomics LESSON 6 Interest Rates and Monetary Policy in the Short Run and the Long Run Introduction and Description This lesson explores the relationship between the nominal interest rate and the

More information

Use the following to answer question 9: Exhibit: Keynesian Cross

Use the following to answer question 9: Exhibit: Keynesian Cross 1. Leading economic indicators are: A) the most popular economic statistics. B) data that are used to construct the consumer price index and the unemployment rate. C) variables that tend to fluctuate in

More information

FISCAL POLICY* Chapter. Key Concepts

FISCAL POLICY* Chapter. Key Concepts Chapter 11 FISCAL POLICY* Key Concepts The Federal Budget The federal budget is an annual statement of the government s expenditures and tax revenues. Using the federal budget to achieve macroeconomic

More information

Solution. Solution. Monetary Policy. macroeconomics. economics

Solution. Solution. Monetary Policy. macroeconomics. economics KrugmanMacro_SM_Ch14.qxp 10/27/05 3:25 PM Page 165 Monetary Policy 1. Go to the FOMC page of the Federal Reserve Board s website (http://www. federalreserve.gov/fomc/) to find the statement issued after

More information

Answers to Text Questions and Problems. Chapter 22. Answers to Review Questions

Answers to Text Questions and Problems. Chapter 22. Answers to Review Questions Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services

More information

With lectures 1-8 behind us, we now have the tools to support the discussion and implementation of economic policy.

With lectures 1-8 behind us, we now have the tools to support the discussion and implementation of economic policy. The Digital Economist Lecture 9 -- Economic Policy With lectures 1-8 behind us, we now have the tools to support the discussion and implementation of economic policy. There is still great debate about

More information

Chapter Outline. Chapter 11. Real-Wage Rigidity. Real-Wage Rigidity

Chapter Outline. Chapter 11. Real-Wage Rigidity. Real-Wage Rigidity Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Chapter Outline Real-Wage Rigidity Price Stickiness Monetary and Fiscal Policy in the Keynesian 2008 Pearson Addison-Wesley. All rights

More information

Economics 152 Solution to Sample Midterm 2

Economics 152 Solution to Sample Midterm 2 Economics 152 Solution to Sample Midterm 2 N. Das PART 1 (84 POINTS): Answer the following 28 multiple choice questions on the scan sheet. Each question is worth 3 points. 1. If Congress passes legislation

More information

Effects of Inflation Unanticipated Inflation in the Labor Market

Effects of Inflation Unanticipated Inflation in the Labor Market Effects of Inflation Unanticipated Inflation in the Labor Market Unanticipated inflation has two main consequences in the labor market: Redistribution of income Departure from full employment Effects of

More information

10/7/2013. Chapter 9: Introduction to Economic Fluctuations. Facts about the business cycle. Unemployment. Okun s Law Y Y

10/7/2013. Chapter 9: Introduction to Economic Fluctuations. Facts about the business cycle. Unemployment. Okun s Law Y Y Facts about the business cycle Chapter 9: GD growth averages 3 3.5 percent per year over the long run with large fluctuations in the short run. Consumption and investment fluctuate with GD, but consumption

More information

MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL*

MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL* Chapter 11 MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL* The Demand for Topic: Influences on Holding 1) The quantity of money that people choose to hold depends on which of the following? I. The price

More information

Agenda. Productivity, Output, and Employment, Part 1. The Production Function. The Production Function. The Production Function. The Demand for Labor

Agenda. Productivity, Output, and Employment, Part 1. The Production Function. The Production Function. The Production Function. The Demand for Labor Agenda Productivity, Output, and Employment, Part 1 3-1 3-2 A production function shows how businesses transform factors of production into output of goods and services through the applications of technology.

More information

The Short-Run Macro Model. The Short-Run Macro Model. The Short-Run Macro Model

The Short-Run Macro Model. The Short-Run Macro Model. The Short-Run Macro Model The Short-Run Macro Model In the short run, spending depends on income, and income depends on spending. The Short-Run Macro Model Short-Run Macro Model A macroeconomic model that explains how changes in

More information

SHORT-RUN FLUCTUATIONS. David Romer. University of California, Berkeley. First version: August 1999 This revision: January 2012

SHORT-RUN FLUCTUATIONS. David Romer. University of California, Berkeley. First version: August 1999 This revision: January 2012 SHORT-RUN FLUCTUATIONS David Romer University of California, Berkeley First version: August 1999 This revision: January 2012 Copyright 2012 by David Romer CONTENTS Preface vi I The IS-MP Model 1 I-1 Monetary

More information

Assignment #3. ECON 410.502 Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma. Notice:

Assignment #3. ECON 410.502 Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma. Notice: ECON 410.502 Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma Assignment #3 Notice: (1) There are 25 multiple-choice problems and 2 analytic (short-answer) problems. This assignment is due on March

More information

Chapter 11. Keynesianism: The Macroeconomics of Wage and Price Rigidity. 2008 Pearson Addison-Wesley. All rights reserved

Chapter 11. Keynesianism: The Macroeconomics of Wage and Price Rigidity. 2008 Pearson Addison-Wesley. All rights reserved Chapter 11 Keynesianism: The Macroeconomics of Wage and Price Rigidity Chapter Outline Real-Wage Rigidity Price Stickiness Monetary and Fiscal Policy in the Keynesian Model The Keynesian Theory of Business

More information

Lesson 8 - Aggregate Demand and Aggregate Supply

Lesson 8 - Aggregate Demand and Aggregate Supply Lesson 8 - Aggregate Demand and Aggregate Supply Acknowledgement: Ed Sexton and Kerry Webb were the primary authors of the material contained in this lesson. Section 1: Aggregate Demand The second macroeconomic

More information

The level of price and inflation Real GDP: the values of goods and services measured using a constant set of prices

The level of price and inflation Real GDP: the values of goods and services measured using a constant set of prices Chapter 2: Key Macroeconomics Variables ECON2 (Spring 20) 2 & 4.3.20 (Tutorial ) National income accounting Gross domestic product (GDP): The market value of all final goods and services produced within

More information

Equilibrium in the Aggregate Economy. Equilibrium in Aggregate Economy. Short-Run Equilibrium. Short-Run Equilibrium

Equilibrium in the Aggregate Economy. Equilibrium in Aggregate Economy. Short-Run Equilibrium. Short-Run Equilibrium quilibrium in Aggregate conomy quilibrium in the Aggregate conomy Changes in the SAS, AD, and curves affect short-run and long-run equilibrium. Short-Run quilibrium Short-run equilibrium is where the AS

More information

Econ 202 H01 Final Exam Spring 2005

Econ 202 H01 Final Exam Spring 2005 Econ202Final Spring 2005 1 Econ 202 H01 Final Exam Spring 2005 1. Which of the following tends to reduce the size of a shift in aggregate demand? a. the multiplier effect b. the crowding-out effect c.

More information

Government Budget and Fiscal Policy CHAPTER

Government Budget and Fiscal Policy CHAPTER Government Budget and Fiscal Policy 11 CHAPTER The National Budget The national budget is the annual statement of the government s expenditures and tax revenues. Fiscal policy is the use of the federal

More information

Aggregate Demand, Aggregate Supply, and the Self-Correcting Economy

Aggregate Demand, Aggregate Supply, and the Self-Correcting Economy Aggregate Demand, Aggregate Supply, and the Self-Correcting Economy The Role of Aggregate Demand & Supply Endogenizing the Price Level Inflation Deflation Price Stability The Aggregate Demand Curve Relates

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Suvey of Macroeconomics, MBA 641 Fall 2006, Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Modern macroeconomics emerged from

More information

ECO209 MACROECONOMIC THEORY. Chapter 11

ECO209 MACROECONOMIC THEORY. Chapter 11 Prof. Gustavo Indart Department of Economics University of Toronto ECO209 MACROECONOMIC THEORY Chapter 11 MONEY, INTEREST, AND INCOME Discussion Questions: 1. The model in Chapter 9 assumed that both the

More information

Problem Set for Chapter 20(Multiple choices)

Problem Set for Chapter 20(Multiple choices) Problem Set for hapter 20(Multiple choices) 1. According to the theory of liquidity preference, a. if the interest rate is below the equilibrium level, then the quantity of money people want to hold is

More information

Answers to Text Questions and Problems in Chapter 8

Answers to Text Questions and Problems in Chapter 8 Answers to Text Questions and Problems in Chapter 8 Answers to Review Questions 1. The key assumption is that, in the short run, firms meet demand at pre-set prices. The fact that firms produce to meet

More information

LECTURE NOTES ON MACROECONOMIC PRINCIPLES

LECTURE NOTES ON MACROECONOMIC PRINCIPLES LECTURE NOTES ON MACROECONOMIC PRINCIPLES Peter Ireland Department of Economics Boston College peter.ireland@bc.edu http://www2.bc.edu/peter-ireland/ec132.html Copyright (c) 2013 by Peter Ireland. Redistribution

More information

The Fiscal Policy and The Monetary Policy. Ing. Mansoor Maitah Ph.D.

The Fiscal Policy and The Monetary Policy. Ing. Mansoor Maitah Ph.D. The Fiscal Policy and The Monetary Policy Ing. Mansoor Maitah Ph.D. Government in the Economy The Government and Fiscal Policy Fiscal Policy changes in taxes and spending that affect the level of GDP to

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Econ 111 Summer 2007 Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The classical dichotomy allows us to explore economic growth

More information

Business Conditions Analysis Prof. Yamin Ahmad ECON 736

Business Conditions Analysis Prof. Yamin Ahmad ECON 736 Business Conditions Analysis Prof. Yamin Ahmad ECON 736 Sample Final Exam Name Id # Instructions: There are two parts to this midterm. Part A consists of multiple choice questions. Please mark the answers

More information

Using Policy to Stabilize the Economy

Using Policy to Stabilize the Economy Using Policy to Stabilize the Economy Since the Employment ct of 1946, economic stabilization has been a goal of U.S. policy. Economists debate how active a role the govt should take to stabilize the economy.

More information

Edmonds Community College Macroeconomic Principles ECON 202C - Winter 2011 Online Course Instructor: Andy Williams

Edmonds Community College Macroeconomic Principles ECON 202C - Winter 2011 Online Course Instructor: Andy Williams Edmonds Community College Macroeconomic Principles ECON 202C - Winter 2011 Online Course Instructor: Andy Williams Textbooks: Economics: Principles, Problems and Policies, 18th Edition, by McConnell, Brue,

More information

INTRODUCTION TO ADVANCED MACROECONOMICS Preliminary Exam with answers September 2014

INTRODUCTION TO ADVANCED MACROECONOMICS Preliminary Exam with answers September 2014 Duration: 120 min INTRODUCTION TO ADVANCED MACROECONOMICS Preliminary Exam with answers September 2014 Format of the mock examination Section A. Multiple Choice Questions (20 % of the total marks) Section

More information

Instructions: Please answer all of the following questions. You are encouraged to work with one another (at your discretion).

Instructions: Please answer all of the following questions. You are encouraged to work with one another (at your discretion). Instructions: Please answer all of the following questions. You are encouraged to work with one another (at your discretion). 1. What are the similarities and differences between the characteristics of

More information

In the news. The Global Economy Aggregate Supply & Demand. Roadmap. In the news. In the news. In the news

In the news. The Global Economy Aggregate Supply & Demand. Roadmap. In the news. In the news. In the news In the news 50% 45% The Global Economy ggregate Supply & Demand Top 10% Income Share 40% 35% 30% Including capital gains Excluding capital gains 25% 1917 1922 1927 1932 1937 1942 1947 1952 1957 1962 1967

More information

The Circular Flow of Income and Expenditure

The Circular Flow of Income and Expenditure The Circular Flow of Income and Expenditure Imports HOUSEHOLDS Savings Taxation Govt Exp OTHER ECONOMIES GOVERNMENT FINANCIAL INSTITUTIONS Factor Incomes Taxation Govt Exp Consumer Exp Exports FIRMS Capital

More information

Pre-Test Chapter 11 ed17

Pre-Test Chapter 11 ed17 Pre-Test Chapter 11 ed17 Multiple Choice Questions 1. Built-in stability means that: A. an annually balanced budget will offset the procyclical tendencies created by state and local finance and thereby

More information

ECON 4423: INTERNATIONAL FINANCE

ECON 4423: INTERNATIONAL FINANCE University of Colorado at Boulder Department of Economics ECON 4423: INTERNATIONAL FINANCE Final Examination Fall 2005 Name: Answer Key Student ID: Instructions: This test is 1 1/2 hours in length. You

More information

Keynesian Macroeconomic Theory

Keynesian Macroeconomic Theory 2 Keynesian Macroeconomic Theory 2.1. The Keynesian Consumption Function 2.2. The Complete Keynesian Model 2.3. The Keynesian-Cross Model 2.4. The IS-LM Model 2.5. The Keynesian AD-AS Model 2.6. Conclusion

More information

Session 12. Aggregate Supply: The Phillips curve. Credibility

Session 12. Aggregate Supply: The Phillips curve. Credibility Session 12. Aggregate Supply: The Phillips curve. Credibility v Potential Output and v Okun s law v The Role of Expectations and the Phillips Curve v Oil Prices and v US Monetary Policy and World Real

More information

FINAL EXAM: Macro 302 Winter 2013

FINAL EXAM: Macro 302 Winter 2013 FINAL EXAM: Macro 302 Winter 2013 Surname: Name: Student Number: State clearly your assumptions when you derive a result. You must always show your thinking to get full credit. You have 3 hours to answer

More information

The IS-LM Model Ing. Mansoor Maitah Ph.D.

The IS-LM Model Ing. Mansoor Maitah Ph.D. The IS-LM Model Ing. Mansoor Maitah Ph.D. Constructing the Keynesian Cross Equilibrium is at the point where Y = C + I + G. If firms were producing at Y 1 then Y > E Because actual expenditure exceeds

More information

MONETARY AND FISCAL POLICY IN THE VERY SHORT RUN

MONETARY AND FISCAL POLICY IN THE VERY SHORT RUN C H A P T E R12 MONETARY AND FISCAL POLICY IN THE VERY SHORT RUN LEARNING OBJECTIVES After reading and studying this chapter, you should be able to: Understand that both fiscal and monetary policy can

More information

Refer to Figure 17-1

Refer to Figure 17-1 Chapter 17 1. Inflation can be measured by the a. change in the consumer price index. b. percentage change in the consumer price index. c. percentage change in the price of a specific commodity. d. change

More information

This paper is not to be removed from the Examination Halls

This paper is not to be removed from the Examination Halls This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON EC2065 ZA BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas

More information

Professor Christina Romer. LECTURE 17 MACROECONOMIC VARIABLES AND ISSUES March 17, 2016

Professor Christina Romer. LECTURE 17 MACROECONOMIC VARIABLES AND ISSUES March 17, 2016 Economics 2 Spring 2016 Professor Christina Romer Professor David Romer LECTURE 17 MACROECONOMIC VARIABLES AND ISSUES March 17, 2016 I. MACROECONOMICS VERSUS MICROECONOMICS II. REAL GDP A. Definition B.

More information

Chapter 16 Output and the Exchange Rate in the Short Run

Chapter 16 Output and the Exchange Rate in the Short Run Chapter 16 Output and the Exchange Rate in the Short Run Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy, Sixth Edition by Paul R. Krugman and Maurice Obstfeld Chapter

More information

Chapter 12: Gross Domestic Product and Growth Section 1

Chapter 12: Gross Domestic Product and Growth Section 1 Chapter 12: Gross Domestic Product and Growth Section 1 Key Terms national income accounting: a system economists use to collect and organize macroeconomic statistics on production, income, investment,

More information

Econ 202 Final Exam. Douglas, Spring 2006 PLEDGE: I have neither given nor received unauthorized help on this exam.

Econ 202 Final Exam. Douglas, Spring 2006 PLEDGE: I have neither given nor received unauthorized help on this exam. , Spring 2006 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 202 Final Exam 1. When the government spends more, the initial effect is that a. aggregate

More information

Homework #6 - Answers. Uses of Macro Policy Due April 20

Homework #6 - Answers. Uses of Macro Policy Due April 20 Page 1 of 8 Uses of Macro Policy ue April 20 Answer all questions on these sheets, adding extra sheets where necessary. 1. Suppose that the government were to increase its purchases of goods and services

More information

A decline in the stock market, which makes consumers poorer, would cause the aggregate demand curve to shift to the left.

A decline in the stock market, which makes consumers poorer, would cause the aggregate demand curve to shift to the left. Economics 304 Final Exam Fall 2000 PART I: TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. (1.5 pts. each) A decline in the stock market, which makes consumers poorer,

More information

S.Y.B.COM. (SEM-III) ECONOMICS

S.Y.B.COM. (SEM-III) ECONOMICS Fill in the Blanks. Module 1 S.Y.B.COM. (SEM-III) ECONOMICS 1. The continuous flow of money and goods and services between firms and households is called the Circular Flow. 2. Saving constitute a leakage

More information

Chapter Outline. Chapter 13. Exchange Rates. Exchange Rates

Chapter Outline. Chapter 13. Exchange Rates. Exchange Rates Chapter 13, Business Cycles, and Macroeconomic Policy in the Open Economy Chapter Outline How Are Determined: A Supply-and-Demand Analysis The IS-LM Model for an Open Economy Macroeconomic Policy in an

More information

CONCEPT OF MACROECONOMICS

CONCEPT OF MACROECONOMICS CONCEPT OF MACROECONOMICS Macroeconomics is the branch of economics that studies economic aggregates (grand totals):e.g. the overall level of prices, output and employment in the economy. If you want to

More information

MACROECONOMICS II INFLATION, UNEMPLOYMENT AND THE PHILLIPS CURVE

MACROECONOMICS II INFLATION, UNEMPLOYMENT AND THE PHILLIPS CURVE MACROECONOMICS II INFLATION, UNEMPLOYMENT AND THE 1 Earlier we noted that the goal of macroeconomic policy is to achieve low inflation and low unemployment. This is because having high levels of either,

More information

Answers. Event: a tax cut 1. affects C, AD curve 2. shifts AD right 3. SR eq m at point B. P and Y higher, unemp lower 4.

Answers. Event: a tax cut 1. affects C, AD curve 2. shifts AD right 3. SR eq m at point B. P and Y higher, unemp lower 4. A C T I V E L E A R N I N G 2: Answers Event: a tax cut 1. affects C, AD curve 2. shifts AD right 3. SR eq m at point B. P and Y higher, unemp lower 4. Over time, P E rises, SRAS shifts left, until LR

More information

Macroeconomics, Fall 2007 Exam 3, TTh classes, various versions

Macroeconomics, Fall 2007 Exam 3, TTh classes, various versions Name: _ Days/Times Class Meets: Today s Date: Macroeconomics, Fall 2007 Exam 3, TTh classes, various versions Read these Instructions carefully! You must follow them exactly! I) On your Scantron card you

More information

Econ 336 - Spring 2007 Homework 5

Econ 336 - Spring 2007 Homework 5 Econ 336 - Spring 2007 Homework 5 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The real exchange rate, q, is defined as A) E times P B)

More information

Definitions and terminology

Definitions and terminology Exchange rates are a confusing concept despite the fact that we have to deal with exchange rates whenever we travel abroad. The handout will tackle the common misconceptions with exchange rates and simplify

More information

] 100 where P 1. is the current price level and P 0

] 100 where P 1. is the current price level and P 0 C h a p t e r 12 INFLATION Chapter Key Ideas Outline From Rome to Rio de Janeiro A. Inflation is a very old problem and some countries even in recent times have experienced rates as high as 40 percent

More information

3 Macroeconomics LESSON 8

3 Macroeconomics LESSON 8 3 Macroeconomics LESSON 8 Fiscal Policy Introduction and Description Fiscal policy is one of the two demand management policies available to policy makers. Government expenditures and the level and type

More information