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

Define hyperinflation.

Aggregating the production of vastly disparate goods whose units of measurement vary widely is a problem. How do macroeconomists attempt to reconcile this difficulty?

Why will the price level tend to rise as firms get closer to their productive capacity?

-Using the graph above, at aggregate output levels below $500 billion what is this economy likely experiencing?

How do expectations impact inflation?

Figure 28.1 -Figure 28.1 depicts a short-run aggregate supply curve. Explain why it is shaped this way. Be very specific.

Assuming a decline in money demand explains what will happen to planned investment and aggregate output.

-Using the above graph, if Hurricane Katrina destroyed a large portion of the infrastructure in the Gulf Coast of the United States, how would this be portrayed using the information depicted in the graph if we assume the economy was originally at point B?

Figure 28.1 -Consider the case in which there is an increase in aggregate demand, and assume that firms in the economy are imperfectly competitive. The increase in aggregate demand shifts the demand curves facing individual firms out. If the firms' wages do not also increase, then firms can increase their profits by raising prices and increasing output. In other words, the response of the overall economy to the aggregate demand increase will be an increase in output and the price level-a positive slope of the short-run AS curve. What is the key assumption in this story that makes it work? Explain.

Assume the economy is operating in the vertical range of the AS curve and the government increases spending. Explain how Fed accommodation can trigger further increases in the price level.

Discuss why the aggregate supply function is relatively flat within the low ranges of aggregate output. Discuss why the aggregate supply function is relatively vertical within the ranges of high aggregate output.

Monetary and Fiscal Policy Effects -Using the above graph, how would you characterize an output level of $800 million?

"Shock therapy" is one means by which hyperinflation can be stopped. In fact Bolivia is an example of a country that used this method. It simply stopped printing money all at once. Why do you suppose this was successful for Bolivia but when other countries tried to stop it by only gradually reducing the printing of money it did not work?

Explain how inflation can be "built into the system."

Why is the short-run aggregate supply curve controversial?

Illustrate the effects of an increase in economic growth on the aggregate supply curve.

Explain why it is not realistic to assume that all input prices (including wages) are fixed when deriving the short-run aggregate supply curve. What is a better assumption?

Critically evaluate the following statement. "If the price of a commodity is rising sharply you can be sure that it is the result of inflation."

Assume the price of everything in the economy including wages and income were to double almost overnight. Explain why this wouldn't necessarily have any impact on production.

What is sustained inflation and what do most economists believe is its root cause?