PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
7th Edition
ISBN: 9781260110920
Author: Frank
Publisher: MCG
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Chapter 15, Problem 2RQ
To determine
Impact of aggregate demand on different variable changes.
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After staying virtually flat for about a year and a half, the average lending rate of banks has started to show signs of decline in April after the Bank of Ghana reduced the monetary policy rate the month before. The Summary of Economic and Financial Data (May 2020) published by the Bank of Ghana has shown that average lending rate has finally moved out of its comfort zone to a step downward. Prior to recording 22.38 percent in April, the average lending rate has since the past 17 months (December 2018) not come below 23%.How would banks benefit when interest rates decrease?
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Macropoland, a country that is a natural gas and oil importer, has a natural rate of unemployment (at the full employment level of GDP) that is about 4.5%, and the long run average rate of inflation over time has been about 2%. However, during the period 1973-1974, the country experienced an inflation rate of about 15% while simultaneously experiencing unemployment of nearly 13%.At the present time, Macropoland is experiencing very sluggish consumption and investment (a result of a fall in the housing market), and unemployment has again edged up to around 9%. Inflation is very low at 0.4%.Macropoland has just hired you as their economic advisor. You have a big job ahead of you. Using your knowledge of aggregate demand and aggregate supply, can you explain what happened in these two time periods?Develop a response that includes examples and evidence to support your ideas, and which clearly communicates the required message to your audience. Organize your response in a clear and logical…
Chapter 15 Solutions
PRINCIPLES OF MACROECONOMICS(LOOSELEAF)
Ch. 15.A - Prob. 15A.1CCCh. 15 - Prob. 1RQCh. 15 - Prob. 2RQCh. 15 - Prob. 3RQCh. 15 - Prob. 4RQCh. 15 - Prob. 5RQCh. 15 - Prob. 6RQCh. 15 - Prob. 7RQCh. 15 - Why, in the absence of public beliefs that the...Ch. 15 - Prob. 9RQ
Ch. 15 - Prob. 10RQCh. 15 - Prob. 1PCh. 15 - For the economy in Problem 1, suppose that...Ch. 15 - Prob. 3PCh. 15 - Prob. 4PCh. 15 - For each of the following, use an AD-AS diagram to...Ch. 15 - Prob. 6PCh. 15 - Suppose that a permanent increase in oil prices...Ch. 15 - An economy is initially in recession. Using the...Ch. 15 - Prob. 9PCh. 15 - Prob. 10PCh. 15 - Prob. 11PCh. 15 - Prob. 15.1CCCh. 15 - Prob. 15.2CCCh. 15 - Prob. 15.3CCCh. 15 - Prob. 15.4CCCh. 15 - Prob. 15.5CCCh. 15 - Prob. 15.6CCCh. 15 - Prob. 15.7CCCh. 15 - Prob. 15.8CCCh. 15 - Prob. 15.9CCCh. 15 - Prob. 15.10CC
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- The Greek letter αα represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that α=$4 billionα=$4 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $4 billion. Suppose the natural level of output is $40 billion of real GDP and that people expect a price level of 110. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 100, 105, 110, 115, and 120.arrow_forwardSuppose the aggregate demand (AD) and short-run aggregate supply (AS) schedules for an economy whose potential GDP (LRAS) equals to $2,700 are given by the table. Now suppose aggregate demand increases by $700 at each price level; for example, the new aggregate demanded at a price level of 50 now equals to $4,200. Add a column of the new aggregate demanded at each price level in the above table. Plot a new AD curve (on the same graph you got in a.) and label the new equilibrium on the same graph. State the new short-run equilibrium price level and real GDP at. How will the shift in AD change the original output, price level, and employment? Name one factor that can cause the increase in aggregate demand and the shifting of the curve.arrow_forwardFor each of the following events, explain the shortrun and long-run effects on output and the price level, assuming policymakers take no action ( Remember SRAS can also shift!!) The stock market declines sharply, reducing consumers’ wealth. (7.5) A technological improvement raises productivity. (7.5)arrow_forward
- President Biden recently boasted of his administration’s success in lowering the deficit of the US government. This reduction could be considered “budget austerity”. Budget austerity usually involves a reduction in federal government spending and/or the raising of taxes to keep the budget deficit under control. Assume that just as austerity was beginning that we found the economy at a level of Ye that was below full employment (Ye < YN), as we did in the first two quarters of 2022. Illustrate graphically using the simple expenditure model developed in class what austerity will mean when for the level of planned spending when we start at Ye<YN, in theory, for the level of planned spending and equilibrium output as it takes effect. Lastly, given the movement you show in planned spending, if any, does the policy of austerity make sense if your goal is use policy to achieve YN? Explain.arrow_forwardQ.1.17 A decrease in the price level will: (a) shift the AS curve to the left.(b) shift the AD curve to the left.(c) shift the AS curve to the right.(d) leave both the AD curve and the AS curve unchanged.arrow_forwardDiscuss how decisions by consumers (householders) and firms can shift the AD curve left or right. Holding AS constant, explain how this will tend to change the equilibrium price level and real GDP produced in the economy. Lastly, how could the government play a role in helping the economy recover from a recession in this model? (11.4)arrow_forward
- COVID-19 has sent the economy of Classica into recession. The finance ministry has advised the government to lower stamp duty and other purchase service charges for those wanting to buy existing houses in order to boost economic growth. As well, the finance ministry wants the government to also cut company taxes as this will lead to firms increasing their level of investment in the economy. The President of Classica has asked you, as her chief economic advisor, for your views. Would a cut in stamp duty and other purchase charges on the purchase of existing houses really boost the economy?arrow_forwardThe Aggregate Demand- Aggregate Supply (AD-AS) model can be used to illustrate that by choosing the right combination of measures (policies) it is possible for the economy to grow without it experiencing inflationary pressures. Discuss four supply-side measures that policy makers can implement to expand the economy without increasing the inflationary pressure in the country? (20arrow_forwardThe following graph shows the aggregate demand (AD₁) and aggregate supply (AS) curves for a hypothetical economy with full-employment output of $11 trillion. PRICE LEVEL (CPI) 130 AS 125 120 115 110 AD1 105 100 95 90 90 8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 12.0 REAL GDP (Trillions of dollars) AD2 Macro Eq 2 ? Suppose the level of real GDP supplied by firms is $9 trillion and the price level is 100. In this case, the quantity of real GDP supplied is the real GDP demanded at a price level of 100, and firms will experience an unplanned in inventories. Firms will respond to the change in inventories by producing output until the economy reaches macroeconomic equilibrium at a price level of and real GDP of Suppose consumers and businesses become more optimistic about future economic conditions, causing the aggregate demand curve to increase by $1.5 trillion at each price level. Use the green line (triangle symbols) to show the new aggregate demand curve (AD 2). Be sure that AD2 is parallel…arrow_forward
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