PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 14, Problem 14.5CC
To determine
Estimate the value of changes in real interest rate.
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Suppose the economy begins at full employment. Label this starting point as point "1."
Then, suppose that, due to increased instability in the financial markets, a decrease in investor and consumer confidence occurs. Show the effects on your graph and label the new equilibrium point "2."
Lastly, suppose the Federal Reserve wants the economy to return to full-employment as quickly as possible. Should the Fed intervene? If so, show the impact of successful monetary policy on your graph. Label this new equilibrium point "3."
The following graph shows the short-run aggregate supply (SRAS) and aggregate demand (AD) curves for a fictional economy that is producing at
point A (grey star symbol), which corresponds to the intersection of the AD₁ and SRAS₁ curves.
80
70
60
50
40
30
20
10
0
0
1
LRAS
----XX
SRAS₂
SRAS₁
AD₂
2
3
4 5 6
QUANTITY OF OUTPUT (Trillions of dollars)
7
According to the graph, actual output of this economy is
AD₁
8
No Intervention
Intervention
(?)
than potential output, which means that the economy experiences
Along SRAS₁, wages would have been negotiated based on an expected price level of . Since the actual price level at point A is 30, this means
that real wages are
▼ had been negotiated, which will
unemployment.
If the Fed does not intervene, these labor market conditions would cause nominal wages to
Eventually, the economy would reach a new long-run equilibrium.
, shifting the
curve to the
Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply.
The quantity of physical capital
The size of the labor force
The level of technological knowledge
The inflation rate
Suppose the economy produces real GDP of $60 billion when unemployment is at its natural rate.
Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph.
Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to (Rise/fall), which will:
Not affect the long-run aggregate supply curve
Shift the long-run aggregate supply curve to the right
Shift the long-run aggregate supply curve to the left
In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve.
Direction of LRAS Curve…
Chapter 14 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
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