Exam 13: Policy Effects and Costs Shocks in the Asad Model

Suppose the economy is initially operating at the potential level of output. Graphically illustrate and explain what effect a one-time permanent reduction in the money supply will have on output and the price level in the short run and in the long run.

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Question 1

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The reduction in the money supply will cause a reduction in aggregate demand. This causes the AD curve to shift left. As AD falls, firms cut production and the price level falls. Over time, wages will be reduced and the short-run aggregate supply curve shifts right. As it does this, the price level continues to fall and output will now increase. In the long run, output returns to the potential level of output and the price is lower. The economy moves from point E0 to E1.

-Using the graph above, between the output levels of $500 billion and $1500 billion what is the relationship between the price level and aggregate output?

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Question 2

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The relationship is positive. As the price level rises the level of aggregate output rises as well.

Assume the Congress passes legislation to spend $1 trillion on new highways and roads across the country. If it is determined that there aren't enough engineers in the United States to build these highways what will be the actual impact of this $1 trillion spending?

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Question 3

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Goods and services can only be produced using real economic resources like raw materials and labor. In this particular case a vital input is lacking - the labor to carry it out. The impact of the $1 trillion in spending is likely to be reduced by the amount of engineers the country is short on to complete the projects.

If inflation is really a monetary phenomena does it really make sense to talk about rising oil prices as a cause of inflation?

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Question 4

What is the general economic view regarding whether the AS curve is vertical in the long run?

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Question 5

Show the effect on the price level and output of a shift of the aggregate demand curve when the economy is operating at or near maximum capacity.

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Question 6

Explain demand-pull inflation

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Question 7

What is the likely impact of expansionary policies when the economy is operating at full capacity on the vertical portion of the AS curve?

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Question 8

Explain the difference between demand-pull inflation and cost-push inflation.

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Question 9

Explain why costs shocks are bad news for policy makers.

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Question 10

Explain why the AS curve cannot be the sum of the supply curves of all the individual firms in the economy.

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Question 11

Explain how action by the Fed might bring about a hyperinflation when the economy is operating on the steep part of the AS curve.

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Question 12

Define aggregate supply.

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Question 13

Why would it be futile for a central government to impose price controls on goods and services in a hyperinflationary environment?

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Question 14

Explain what the aggregate supply curve represents.

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Question 15

Explain why expansionary policy is not likely to work very well when the economy is operating along the steeper portion of the aggregate supply curve.

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Question 16

Indicate the effects of cost shocks upon the aggregate supply (AS) function.

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Question 17

China owns hundreds of billions of dollars worth of U.S. federal debt. If suddenly they lost their appetite for purchasing federal debt and began selling off large portions of their U.S. debt holdings, how would this hamper the efforts of the federal government's effort to maintain continued deficit spending, even with the help of the Federal Reserve?

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Question 18

The reaction of firms to an expansion in aggregate demand is likely to depend on what two factors?

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Question 19

Draw an aggregate supply curve in which all prices (both input and output prices) change at the same rate.

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Question 20

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Suppose the economy is initially operating at the potential level of output. Graphically illustrate and explain what effect a one-time permanent reduction in the money supply will have on output and the price level in the short run and in the long run.

-Using the graph above, between the output levels of $500 billion and $1500 billion what is the relationship between the price level and aggregate output?

Assume the Congress passes legislation to spend $1 trillion on new highways and roads across the country. If it is determined that there aren't enough engineers in the United States to build these highways what will be the actual impact of this $1 trillion spending?

If inflation is really a monetary phenomena does it really make sense to talk about rising oil prices as a cause of inflation?

What is the general economic view regarding whether the AS curve is vertical in the long run?

Show the effect on the price level and output of a shift of the aggregate demand curve when the economy is operating at or near maximum capacity.

Explain demand-pull inflation

What is the likely impact of expansionary policies when the economy is operating at full capacity on the vertical portion of the AS curve?

Explain the difference between demand-pull inflation and cost-push inflation.

Explain why costs shocks are bad news for policy makers.

Explain why the AS curve cannot be the sum of the supply curves of all the individual firms in the economy.

Explain how action by the Fed might bring about a hyperinflation when the economy is operating on the steep part of the AS curve.

Define aggregate supply.

Why would it be futile for a central government to impose price controls on goods and services in a hyperinflationary environment?

Explain what the aggregate supply curve represents.

Explain why expansionary policy is not likely to work very well when the economy is operating along the steeper portion of the aggregate supply curve.

Indicate the effects of cost shocks upon the aggregate supply (AS) function.

The reaction of firms to an expansion in aggregate demand is likely to depend on what two factors?

Draw an aggregate supply curve in which all prices (both input and output prices) change at the same rate.

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Introduction to Macroeconomics

Measuring National Output and National Income

Unemployment, Inflation, and Long-Run Growth

Aggregate Expenditure and Equilibrium Output

The Government and Fiscal Policy

The Money Supply and the Federal Reserve System

Money Demand and the Equilibrium Interest Rate

The Determination of Aggregate Output, the Price Level, and the Interest Rate

The Labor Market in the Macroeconomy

Financial Crises, Stabilization, and Deficits

Household and Firm Behavior in the Macroeconomy: a Further Look

Long-Run Growth

Alternative Views in Macroeconomics

International Trade, Comparative Advantage, and Protectionism

Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates

Economic Growth in Developing and Transitional Economies

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