Chat with AIExam 12: Part A: Aggregate Demand and Aggregate Supply
Using the aggregate demand-aggregate supply (short-run) model, explain the impact of the public's expectations of severe inflation on real GDP and the price level.
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VerifiedIncreased expectations of severe inflation would cause the public to accelerate expenditures to avoid higher future prices.As a result, the aggregate demand curve would shift rightward and cause demand-pull inflation.However, these expectations also affect aggregate supply.People would want higher wages and salaries now to compensate them for the expected inflation.Unless productivity rose at the same rate, these demands for higher incomes would push up labour costs of production and would shift the aggregate supply curve to the left.A higher equilibrium price level would result.Furthermore, if the leftward shift in aggregate supply exceeds the rightward shift in aggregate demand, a lower level of real GDP would result.The only certainty is that increased expectations of severe inflation add to the probability of severe inflation because of the behaviour of consumers and wage earners.
Explain the relationship between the aggregate expenditures model in graph (A) below and the aggregate demand model in graph (B) below.In other words, explain how points 1, 2, and 3 are related to points 1', 2', and 3'. 
(36) VerifiedThrough the real-balances, interest-rate, and foreign trade effects, the consumption, investment, and net exports schedules and therefore the aggregate expenditures schedule will shift upward when the price level declines and downward when the price level increases.The aggregate expenditures schedule is at AE2 (at P2) when the price level is P2.P2 and the equilibrium level of output, GDP2, combine to determine one point (2') on the aggregate demand curve.A lower price level such as P1 shifts the aggregate expenditures schedule to AE1 (at P1).P1 and the new equilibrium level of output, GDP1, combine to determine point 1' on the aggregate demand curve.Similarly, a higher price level at P3 shifts aggregate expenditures down to AE3 (at P3).P3 and GDP3 yield another point on the aggregate demand curve at 3'.
Why does aggregate demand shift outward by a greater amount than the initial change in spending?
(32) VerifiedThe basic reason is because of the multiplier.As shown by the aggregate expenditures model, an initial increase in spending times the multiplier will be the amount that aggregate expenditures shift upward.The size of this total increase will also be the amount of the shift of the aggregate demand curve outward.Thus, the shift of the aggregate demand curve will be equal to the initial change in spending times the multiplier.
Using the aggregate demand-aggregate supply (short-run) model, explain how a reduction in business taxes would affect the economy.
(45) What is the effect on the multiplier when an increase in aggregate demand also causes the price level to rise?
(40) Suppose the aggregate demand and short-run aggregate supply schedules for a hypothetical economy are as shown below:
(a) What will be the equilibrium price and real output level in this hypothetical economy? Is this level of real GDP also the full-employment level of output? Explain.(b) Why won't a price level of 100 be the equilibrium price level? Why won't a price level of 110 index be the equilibrium price level?
(c) Suppose aggregate demand increases by $120 billion at each price level.What will be the new equilibrium price and output levels?
(d) What factors might cause aggregate demand to increase?
(e) Suppose short-run aggregate supply increases by $120 billion at each price level.What will be the new equilibrium price and output levels?
(a) What will be the equilibrium price and real output level in this hypothetical economy? Is this level of real GDP also the full-employment level of output? Explain.(b) Why won't a price level of 100 be the equilibrium price level? Why won't a price level of 110 index be the equilibrium price level?
(c) Suppose aggregate demand increases by $120 billion at each price level.What will be the new equilibrium price and output levels?
(d) What factors might cause aggregate demand to increase?
(e) Suppose short-run aggregate supply increases by $120 billion at each price level.What will be the new equilibrium price and output levels? (39) What determines the equilibrium price level and the level of real GDP in the aggregate demand-aggregate supply (short-run) model?
(38) What is the aggregate demand curve? What is the characteristic of its slope?
(39) Economists think of three different aggregate supply curves based upon the time frame of observation.Briefly describe each.
(40) The determinants of aggregate demand "determine" the location of the aggregate demand curve.Explain the four basic determinants of aggregate demand.
(40) How can an economy already at full-employment expand without igniting inflation? Explain.
(39) How is the short-run aggregate supply curve sloped and why is it sloped this way?
(35) Suppose the aggregate demand and short-run aggregate supply schedules for a hypothetical economy are as shown below:
(a) What will be the equilibrium price and real output level in this hypothetical economy? Is this level of real GDP also the full-employment level of output? Explain.(b) Why won't a price level of 110 be the equilibrium price level? Why won't a price level of 130 index be the equilibrium price level?
(c) Suppose aggregate demand increases by $400 billion at each price level.What will be the new equilibrium price and output levels?
(d) What factors might cause aggregate demand to increase?
(a) What will be the equilibrium price and real output level in this hypothetical economy? Is this level of real GDP also the full-employment level of output? Explain.(b) Why won't a price level of 110 be the equilibrium price level? Why won't a price level of 130 index be the equilibrium price level?
(c) Suppose aggregate demand increases by $400 billion at each price level.What will be the new equilibrium price and output levels?
(d) What factors might cause aggregate demand to increase? (27) Suppose that a hypothetical economy has the following relationship between its real domestic output and the input quantities necessary for producing that level of output. 
(a) What is the level of productivity in this economy?
(b) What is the unit cost of production if the price of each input is $2.00?
(c) If the input price decreases from $2 to $1.50, what is the new per unit cost of production? What impact would this have on the short-run aggregate supply curve?
(d) Suppose that instead of the input price decreasing, the productivity had increased by 25%.What will be the new unit cost of production? What impact would this change have on the short-run aggregate supply curve?
(a) What is the level of productivity in this economy?
(b) What is the unit cost of production if the price of each input is $2.00?
(c) If the input price decreases from $2 to $1.50, what is the new per unit cost of production? What impact would this have on the short-run aggregate supply curve?
(d) Suppose that instead of the input price decreasing, the productivity had increased by 25%.What will be the new unit cost of production? What impact would this change have on the short-run aggregate supply curve? (44) What is the difference in the explanation of the shape of the aggregate demand curve and a single product demand curve? After all, both demand curves show an inverse relationship between price and quantity.
(34) Using the aggregate demand-aggregate supply (short-run) model, explain how the depreciation of the Canadian dollar in terms of foreign currencies would affect the economy.
(32) Differentiate between "demand-pull" and "cost-push" inflation using the aggregate demand-aggregate supply (short-run) model.
(34) In the below diagram assume that the aggregate demand curve shifts from AD1 in year 1 to AD2 in year 2, only to fall back to AD1 in year 3. 
(a) Explain what will happen to the equilibrium price level and the equilibrium level of real GDP from year 1 to year 2.(b) Locate the new position in year 3 on the assumption that prices and wages are completely flexible downward.Label this position, Pb and GDPb for the price level and real GDP respectively.(c) Locate the new position in year 3 on the assumption that prices and wages are completely inflexible downward.Label this position, Pc and GDPc for the price level and real GDP respectively.
(a) Explain what will happen to the equilibrium price level and the equilibrium level of real GDP from year 1 to year 2.(b) Locate the new position in year 3 on the assumption that prices and wages are completely flexible downward.Label this position, Pb and GDPb for the price level and real GDP respectively.(c) Locate the new position in year 3 on the assumption that prices and wages are completely inflexible downward.Label this position, Pc and GDPc for the price level and real GDP respectively. (33) Is the downward price inflexibility applicable to today's economy? Why or why not?
(32) How is the immediate short-run aggregate supply curve sloped? Explain.
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