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

Explain what is meant by potential output.

-Using the above graph assume that the economy is in equilibrium at an output level of $600 billion and a price level of 110. What would happen to the aggregate output level and the price level if wages fell and their was an increase in government spending?

-Using the above graph assume that the economy is in equilibrium at an output level of $600 billion and a price level of 110. What would happen to the aggregate output level and the price level with an expansionary monetary policy?

Using aggregate supply and aggregate demand analysis illustrate with the use of a graph the effect of cost-push inflation on the economy.

-Using the graph above, at aggregate output levels above $1500 billion what is happening to both costs and prices?

Explain why a sustained inflation must be a purely monetary phenomenon and cannot exist without the cooperation of the Federal Reserve.

At what point might the aggregate supply curve become completely vertical? Why might this be true?

Coal is used as a source of energy in many manufacturing processes. Assume a long strike by coal miners reduced the supply of coal and increased the price of coal. What impact would this have on the economy? Use the AS/AD model to explain your answer.

Show using graphs and explain what is the likely impact of expansionary policies when the economy is operating at excess capacity on the flat, horizontal portion of the AS curve? Graphically illustrate this policy effect.

If input prices are increasing at the same rate as prices what can we conclude about the shape of the aggregate supply curve?

What is the macroeconomic equilibrium price level?

Explain in broad terms what the equilibrium price level and equilibrium output level correspond to with respect to the money market and the goods market.

Will a decrease in inflationary expectations affect aggregate supply or aggregate demand? Explain why it affects the one you chose. Using an AS/AD diagram, illustrate how a decrease in inflationary expectations affects the output level and the price level in the economy. Explain why these changes occur.

Explain under which circumstances the government will not be able to increase non-taxed-financed spending without the Fed's cooperation.

Explain how economic decline can happen as it relates to the capital stock.

Using aggregate supply and aggregate demand curves, indicate what impact each of the following would have on the price level and on the equilibrium level of aggregate output in the short run. (a) The Fed buys bonds in the open market. (b) The economy is far below capacity and the government increases government spending. (c) The floods in the Midwest in 1993 destroyed a large portion of the United States' agricultural crops.

Demonstrate on a graph the effect on output and the price level if there is an increase in aggregate demand along the nearly flat part of the aggregate supply curve.

What do the authors of the text mean when they say that an "aggregate supply curve" in the traditional sense of the word supply does not exist?

Explain cost-push inflation and give an example of a possible cause.

Illustrate what happens to the aggregate supply curve when there is an increase in costs (for example, and increase in wage rates or energy prices).