Compare and contrast the microeconomic forces of demand and supply with the macroeconomic forces of aggregate demand and aggregate supply. How do the opportunity costs of buyers in the micro context of a single market (for example, for buyers of gasoline) compare to the opportunity costs of all buyers in the macro context of aggregate demand?
Explain how the Federal Reserve plays a central role in determining the slope of the aggregate demand curve. For example, if a lower price level leads inflation to be below the Fed’s target rate, how will the Fed likely react and how will its actions eventually impact the quantity of goods and services people want to buy?
What changes to the economy will lead the aggregate demand curve to shift? What changes will lead to a movement along the aggregate demand curve? Provide a few examples to illustrate your answer.
How do businesses change their prices at different levels of output, and how does this lead to an upward-sloping aggregate supply curve?
What changes to the economy will lead the aggregate supply curve to shift? What changes will lead to a movement along the aggregate supply curve? Provide a few examples to illustrate your answer.
Explain how—depending on the circumstances—the Fed changing the real interest rate can lead either to a movement along the aggregate demand curve or to a shift of the aggregate demand curve. Be sure to consider the two types of responses from the Fed.
Illustrate in separate AD-AS graphs how the macroeconomic equilibrium will change when the Federal Reserve pursues an expansionary monetary policy and when it pursues a contractionary monetary policy. What macroeconomic problems might an expansionary monetary policy solve? What about a contractionary monetary policy?
Explain how an initial increase in government purchases can increase GDP by a greater amount than the increase in government spending.
Think of at least one example of a change to the economy that will lead to the following outcomes and illustrate your answers with an AD-AS graph.
GDP increases and the price level increases.
GDP increases and the price level decreases.
GDP decreases and the price level decreases.
GDP decreases and the price level increases.
Explain why, in the long run, a change in prices has no impact on output. What impact does aggregate demand have in determining output in the long run?
One common argument against expansionary fiscal or monetary policy goes like this, “Since the economy returns to potential output in the long run, we should not react to the short-term fluctuations in the economy. If we do nothing, the economy will fix itself.” Formulate a counter-argument. Which argument do you agree with and why?
Why does aggregate supply analysis require looking at specific time horizons to predict macroeconomic outcomes?
Draw aggregate demand and aggregate supply curves where macroeconomic equilibrium occurs at an output of $17 trillion. On your graph, indicate the equilibrium price level, but don’t worry about assigning it an exact value. Indicate on the graph where macroeconomic equilibrium occurs. Make sure to label each part of the graph.
For each of the following, use a graph to show the shift in aggregate demand.
Poor numbers from several leading economic indicators cause businesses to become pessimistic about the future of the economy.
Congress passes a new budget that increases government purchases by 3%.
Housing prices have been declining in recent years, leading homeowners to feel less prosperous.
The Chinese government eliminates the tariffs it charges on goods exported from the United States.
Banks become complacent and begin taking on riskier business loans at lower interest rates.
A rise in the price level leads the Fed to increase the real interest rate.
Illustrate how each of the following will impact aggregate supply and explain your reasoning.
The implementation of artificial intelligence in manufacturing has led to faster than expected productivity growth.
Low levels of output across the entire economy leave many businesses with excess capacity, leading them to lower their prices by 3%.
A bill is passed in Congress that increases the federal minimum wage from $7.25 an hour to $12.50 an hour.
The U.S. dollar depreciates relative to the Chinese yuan.
To combat a recession, the Indian government enacts expansionary fiscal policy, which increases government spending by 2 trillion rupees. In response, GDP increases by 6 trillion rupees.
What is the multiplier?
Illustrate the impact of this expansionary fiscal policy on the Indian economy using an AD-AS graph.
How will the price level change?
For each of the following, forecast how prices and output will change by drawing an AD-AS graph, and explain your answers using the three-step recipe to forecast macroeconomic outcomes.
The Fed decreases interest rates amid concerns of a looming recession.
The latest data on consumer confidence indicate that consumers have become pessimistic about the future of the economy and are therefore spending less.
Innovations in solar cell technology cause energy prices to decline across the country.
The federal government passes a new bill that dramatically increases government spending on education and the military.
The Mexican government eliminates the tariffs it charges on goods exported from the United States.
Top executives report that they’re quite uncertain about the future, as trade deals with the country’s largest trading partners are being renegotiated and remain in flux.
Automation by the largest shipping and transportation companies have significantly decreased the transportation costs for businesses across the country.
In an effort to boost output, the government passes a large fiscal stimulus that raises government spending by $1 trillion. Use the AD-AS framework to predict how prices and output change in the very short run, in the short run, in the medium run, and in the long run.
For each of the following scenarios predict how the price level and output will change over time from immediate impact to long-run impact. In each case, consider an economy that was initially producing at its level of potential output.
The government passes legislation that increases corporate taxes by 25%.
Economies around the globe are experiencing a time of prosperity and, as a result, demand for U.S. exports increases.