04 Jun eek 5 Homework Chapter 7
uestion
EC141 Week 5 Homework
Chapter 7
2. What assumptions cause the immediate-short-run aggregate supply curve to be horizontal? Why is the long-run aggregate supply curve vertical? Explain the shape of the short-run aggregate supply curve. Why is the short-run curve relatively flat to the left of the full-employment output and relatively steep to the right? LO2
3. Other things equal, what effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and the level of real output. LO3
a. A reduction in the economy’s real interest rate.
b. A major increase in Federal spending for health care (with no increase in taxes).
c. The complete disintegration of OPEC, causing oil prices to fall by one-half.
d. A 10 percent reduction in personal income tax rates (with no change in government spending).
e. A sizable increase in labor productivity (with no change in nominal wages).
f. A 12 percent increase in nominal wages (with no change in productivity).
g. A sizable depreciation in the international value of the dollar.
4. Other things equal, what effect will each of the following have on the equilibrium price level and level of real output? LO3
a. An increase in aggregate demand in the steep portion of the aggregate supply curve.
b. An increase in aggregate supply with no change in aggregate demand (assume that prices and wages are flexible upward and downward).
c. Equal increases in aggregate demand and aggregate supply.
d. A reduction in aggregate demand in the flat portion of the aggregate supply curve.
e. An increase in aggregate demand and a decrease in aggregate supply.
7. In early 2001 investment spending sharply declined in the United States. In the 2 months following the September 11, 2001, attacks on the United States, consumption also declined. Use AD-AS analysis to show the two impacts on real GDP. LO4
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