aggregate demand questons

Problem 4

Use Aggregate Demand and Aggregate Supply analysis to illustrate an economy operating at full employment with normal amounts of frictional unemployment. Label the original demand curve AD0, the original supply curve AS0, the initial equilibrium point a, and the initial output level Qf.

a.Lax enforcement of antitrust laws and intense merger activity disturbs the macroeconomic equilibrium. illustrate this shift on your graph by labeling the new curve with a subscript 1. Label the new equilibrium point b, and the new level of output Q1.

b.The country’s leader is alarmed about this situation. She decides to pressure the central bank into lowering the reserve requirement. Illustrate the likely result of this policy on your graph. Label your new curve with a subscript 1. Label the new equilibrium point c. What is the level of real output? ______

c.The situation described above is what kind inflation?

________________

Problem 5

Use up arrows (↑), down arrows (↓), zeros (0), or questions marks (?) to indicate how (i) Aggregate Demand and (ii) Aggregate Supply will be shifted by the events described below, and how each will affect (iii) National Income and Output, (iv) employment, (v) unemployment rates, and (vi) the price level. Aggregate Demand and Supply may both be affected in some cases, some reasonable arguments are debatable, and long-run consequences can differ from short-run effects.

a.The FED increases sales of U.S. Treasury bonds to prevent a jump in energy prices from triggering excessive cost-push inflation. i. _____ ii. _____ iii. _____ iv. _____ v. _____

vi._____

b.Voters blame incumbents for the Depression of 2003-2004. Federal income tax rates are cut by 10% just before the 2004 election. i. _____ ii. _____ iii. _____ iv. _____ v. _____

vi._____

c.All barriers to free trade between all countries in North and South America are eliminated.

i. _____ ii. _____ iii. _____ iv. _____ v. _____ vi. _____

d.An environmental protection law requires all U.S. firms to reduce their pollution per unit of output by 50% before the year 2005. i. _____ ii. _____ iii. _____ iv. _____ v. _____

vi._____

e.Baby-boomers intent on maintaining standards of living when they retire double the percentages of disposable income they save. i. _____ ii. _____ iii. _____ iv. _____

v._____ vi. _____

f.The federal budget is balanced by slashing defense spending by $300,000,000,000. i. _____

ii. _____ iii. _____ iv. _____ v. _____ vi. _____

g.The Japanese Parliament eliminates all tariffs and quotas on U.S. agricultural products. i. _____ ii. _____ iii. _____ iv. _____ v. _____ vi. _____

h.Congress relaxes our immigration laws to accommodate a new wave of political refugees. i. _____ ii. _____ iii. _____ iv. _____ v. _____ vi. _____

234 Chapter 34 / 16: Microfoundations of Macroeconomic Policy

ANSWERS

236 Chapter 34 / 16: Microfoundations of Macroeconomic Policy