Chapter 23, Output and Prices in the Short Run Video Solutions, Macroeconomics, Fifteenth Canadian Edition

Problem 1

Fill in the blanks to make the following statements correct.
a. In the simple macro model of the previous two chapters, the price level was ________ to the model. In the macro model of this chapter, the price level is ________ to the model.
b. A change in the price level shifts the $A E$ curve because the price level change affects desired ________ and desired ________.
c. A rise in the price level causes a(n) ________ in households' wealth, which leads to a(n) ________ in desired consumption, which causes the $A E$ curve to shift ________. A fall in the price level causes a(n) ________ in households' wealth, which leads to a(n) ________ in desired consumption, which causes the ${A E}$ curve to shift ________.
d. A rise in the domestic price level causes net exports to ________, which causes the $A E$ curve to shift ________. A fall in the domestic price level causes net exports to ________, which causes the $A E$ curve to shift ________.
e. Equilibrium GDP is determined by the position of the $A E$ function for each given price level. An equilibrium point for a particular price level corresponds to one point on the ________ curve.
f. A rise in the price level causes a downward shift of the curve ________ and a movement upward along the ________ curve.
g. An increase in autonomous expenditure, with no change in the price level, causes the $A E$ curve to ________ and causes the $A D$ curve to ________.

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Problem 2

Fill in the blanks to make the following statements correct.
a. The ____ curve relates the price level to the quantity of output that firms would like to produce and sell.
b. Each aggregate supply curve is drawn under the assumption that ________ and ________ remain constant.
c. The aggregate supply curve is upward sloping because firms will produce more output only if price ________ to offset higher unit costs.
d. The aggregate supply curve is relatively flat when GDP is below potential output because firms typically have ________ and are able to expand production with little or no increase in unit costs.
e. The aggregate supply curve is relatively steep when GDP is above potential output because firms are operating above ________ and ________ are rising rapidly.
f. The aggregate supply curve shifts in response to changes in ________ and changes in ________. These are known as supply ________.

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Problem 3

Fill in the blanks to make the following statements correct.
a. Macroeconomic equilibrium occurs at the intersection of _________ and _________, and determines equilibrium levels of _________ and _________.
b. If the $A S$ curve is upward sloping, a positive $A D$ shock will cause the price level to _________ and real GDP to _________. A negative $A D$ shock will cause the price level to _________ and real GDP to _________.
c. A positive AS shock will cause the price level to _________ and real GDP to _________. A negative $A S$ shock will cause the price level to _________ and real GDP to _________.
d. In previous chapters, the simple multiplier measured the change in real GDP in response to a change in autonomous expenditure when the price level was constant. When the price level varies, the multiplier is _________ than the simple multiplier.
e. An increase in autonomous government spending is $a(n)$ _________ $A D$ shock, which will initially cause $a(n)$ _________ shift of the $A E$ curve and a(n) - _________ shift of the $A D$ curve. Given an upward. shift of the $A D$ curve. Given an upward aggregate supply curve, there will be $\mathrm{a}(\mathrm{n})$ _________ in the price level, which leads to a partial _________ shift of the $A E$ curve.

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Problem 4

Consider the effects of an exogenous increase in the domestic price level. For each of the assets listed, explain how the change in the price level would affect the wealth of the asset holder. Then explain the effect on aggregate (private sector) wealth. The footnote on page 535 will help to answer parts (d) and (e) of this question.
a. Cash holdings
b. Deposits in a bank account
c. A household mortgage
d. A corporate bond that promises to pay the bondholder $$\$ 10000$$ on January 1,2015
e. A government bond that promises to pay the holder $$\$ 10000$$ on January 1, 2015

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09:57

Problem 5

Consider the following simplified $A E$ function:
$$
A E=350+0.8 Y+0.1(M / P)
$$
where $A E$ is desired aggregate expenditure, $Y$ is real GDP, $M$ is the private sector's nominal wealth, and $P$ is the price level. Suppose that $M$ is constant and equal to 6000 .
a. Fill in the table below:
$$
\begin{array}{lcc}
\hline P & M / P & A E \\
\hline 1 & 6000 & 950+0.8 Y \\
2 & - & - \\
3 & - & - \\
4 & - & - \\
5 & - & - \\
6 & - & - \\
\hline
\end{array}
$$
b. Plot each of the $A E$ functions-one for each price level $\longrightarrow$ on the same-scale $45^{\circ}$-line diagram.
c. Compute the level of equilibrium national income ( $Y$ ) for each of the values of $P$. For example, when $P=1, A E=950+0.8 Y$. Thus the equilibrium level of $Y$ is such that $Y=950+0.8 Y$, which implies $Y=4750$.
d. Plot the pairs of price level and equilibrium national income on a scale diagram with $P$ on the vertical axis and $Y$ on the horizontal axis. What is this curve you have just constructed?
e. Explain why the expression for $A E$ above makes sense. Why do $M$ and $P$ enter the $A E$ function?

Sandile Ndlovu

Numerade Educator

04:44

Problem 6

Consider the following diagram showing the $A D$ curves in two different economies. One economy is Autarkland-it does not trade with the rest of the world (autarky is a situation in which a country does not trade with other countries). The other economy is Openland-it exports to and imports from the rest of the world.
(Figure can't copy)
a. Explain why an increase in the domestic price level (for a given exchange rate) reduces net exports in Openland. How would you illustrate this with the $A E$ curve in the $45^{\circ}$-line diagram?
b. Explain why the $A D$ curve is steeper in Autarkland than in Openland.
c. If there are never any net exports in Autarkland, why isn't the $A D$ curve vertical? Explain what other aspect of the economy generates a downward-sloping $A D$ curve.

Alex Loukas

Numerade Educator

03:04

Problem 7

The economy of Neverland has the following $A D$ and $A S$ schedules. Denote $\mathrm{Y}_{A D}$ as the level of real GDP along the $A D$ curve; let $\mathrm{Y}_{A S}$ be the level of real GDP along the AS curve. GDP is shown in billions of 2002 dollars.
$$
\begin{array}{crc}
\hline \text { Price Level } & Y_{A D} & Y_{A S} \\
\hline 90 & 1100 & 750 \\
100 & 1000 & 825 \\
110 & 900 & 900 \\
120 & 800 & 975 \\
130 & 700 & 1050 \\
140 & 600 & 1125 \\
\hline
\end{array}
$$
a. Plot the $A D$ and $A S$ curves on a scale diagram.
b. What is the price level and level of real GDP in Neverland's macroeconomic equilibrium?
c. Suppose the level of potential output in Neverland is $$\$ 950$$ billion. Is the current equilibrium level of real GDP greater than or less than potential? How does one refer to this particular output gap?

Xiaomin Bian

Numerade Educator

04:22

Problem 8

Each of the following events caused a shift in the $A D$ or AS curve in Canada. Identify which curve was affected and describe the effect on equilibrium real GDP and the price level.
a. OPEC's actions to restrict oil output significantly increased the world price of oil in 1979-1980.
b. World commodity prices increased sharply from 2002 to 2008. Many of these commodities are both produced in Canada and used as important inputs for Canadian firms.
c. The end of the Cold War in 1990 led to large declines in defence spending in many countries (including Canada).
d. The federal government and (many) provincial governments reduced corporate income-tax rates between 2000 and 2011.
e. The federal government increased its level of government purchases $(G)$ in 2009 and 2010, amidst a global recession.
f. The beginning of a strong recovery in the United States in 2014 led to a large increase in the demand for many Canadian exports.
g. The world price of oil fell from U.S. $$\$ 105$$ per barrel in June 2014 to U.S. $$\$50$$ in February 2015.

Natalie Britton

Numerade Educator

Problem 9

The following diagrams show the $A D$ and $A S$ curves in two different economies.
(Figure can't copy)
a. Explain what aspect of firms' behaviour might give rise to the horizontal AS curve in Economy A.
b. Explain what aspect of firms' behaviour gives rise to the upward-sloping $A S$ curve in Economy $B$.
c. In which economy is output purely demand determined? Explain.
d. Consider the effects of an increase in autonomous expenditure. Which economy has the larger multiplier? Explain your reasoning.

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08:30

Problem 10

This question involves algebraically solving the system of two equations given by the $A D$ and $A S$ curves. The equations for the curves are given by
$$
\begin{aligned}
& A D: Y_{A D}=710-30 P+5 G \\
& A S: Y_{A S}=10+5 P-2 P_{\text {OIL }}
\end{aligned}
$$
where $Y$ is real GDP, $P$ is the price level, $G$ is the level of government purchases, and $\mathrm{P}_{\mathrm{OIL}}$ is the world price of oil.
a. Explain the various terms in the $A D$ curve. Explain why $G$ enters positively.
b. What is the value of the simple multiplier? (Hint: Refer back to the caption of Figure 23-3.)
c. Explain the various terms in the AS curve. Explain why the price of oil enters negatively.
d. Solve for the equilibrium value of real GDP and the price level.
e. Using your solution to part (d), what is the effect of a change in $G$ on equilibrium $Y$ and $P$ ? Explain.
f. Using your solution to part (d), what is the effect of a change in $\mathrm{P}_{\mathrm{OIL}}$ on equilibrium $\mathrm{Y}$ and $P$ ? Explain.

Sarah Lewites

Numerade Educator