Tutorial Topic: Aggregate Demand and Aggregate Supply
Economics BUS-111 & 112
Tutorial Topic: Aggregate demand and aggregate supply
The influence of monetary and fiscal policy on aggregate demand
Tutorial Number: 12
Lecturer: Amos Rao
Date Published: 23/10/2012
Chapter 33 – Aggregate demand and aggregate supply
Question 1
Suppose that the economy is in a long-run equilibrium.
a. Draw a diagram to illustrate the state of the economy. Be sure to show aggregate demand, short-run aggregate supply, and long-run aggregate supply.
b. Now suppose that a stock-market crash cause aggregate demand to fall. Use your diagram to show what happens to output and the price level in the short run. What happens to the unemployment rate?
c. Use the sticky-wage theory of aggregate supply to explain what will happen to output and the price level in the long run (assuming there is no change in policy). What role does the expected price level play in this adjustment? Be sure to illustrate your analysis in a graph.
Question 2
Explain whether each of the following events will increase, decrease, or have no effect on long-run aggregate supply.
a. The United States experiences a wave of immigration.
b. Congress raises the minimum wage to $10 per hour.
c. Intel invents a new and more powerful computer chip.
d. A severe hurricane damages factories along the East Coast.
Question 3
In 1939, with the U.S economy not yet fully recovered from the Great Depression, President Roosevelt proclaimed that Thanksgiving would fall a week earlier than usual so that the shopping period before Christmas would be longer. Explain what President Roosevelt might have been trying to achieve, using the model of aggregate demand and aggregate supply.
Question 4
Explain why the following statements are false.
a. “The aggregate-demand curve slopes downward because it is the horizontal sum of the demand curves for individual goods.”
b. “The long-run aggregate-supply curve is vertical because economic forces do not affect long-run aggregate supply.”
c. “If firms adjusted their prices every day, then the short-run aggregate-supply curve would be horizontal.”
d. “Whenever the economy enters a recession, its long-run aggregate-supply curve shifts to the left.”
Chapter 34 – The influence of monetary and fiscal policy on aggregate demand
Question 5
a. What is the theory of liquidity preference? How does it help explain the downward slope of the aggregate-demand curve?
b. Use the theory of liquidity preference to explain how a decrease in the money supply affects the aggregate-demand curve.
c. The government spends $3billon to buy police cars. Explain why aggregate demand might increase by more than $3 billon. Explain why aggregate demand might increase by less than $3 billion.
Question 6
a. Suppose that survey measures of consumer confidence indicate a wave of pessimism is sweeping the country. If policymakers do nothing, what will happen to aggregate demand? What should the Fed do if it wants to stabilize aggregate demand? If the Fed does nothing, what might Congress do stabilize aggregate demand?
b. Give an example of a government policy that acts as an automatic stabilizer. Explain why the policy has this effect?
Question 7
Suppose banks install automatic teller machines on every block and, by making cash readily available, reduce the amount of money people want to hold.
a. Assume the Fed does not change the money supply. According to the theory of liquidity preference, what happens to the interest rate?
b. If the Fed wants to stabilize aggregate demand, how should it respond?
c. How can the Fed increase money supply using open market operations?
Question 8
Consider two policies – a tax cut that will last for only 1 year and a tax cut that is expected to be permanent. Which policy will stimulate greater spending by consumers? Which policy will have the greater impact on aggregate demand? Explain.
Page:Page 1 of 4 / Tutorial Topic:
Aggregate demand and aggregate supply
The influence of monetary and fiscal policy on aggregate demand
/ Tutorial Number:
12 / Date Updated:
23/10/2012