Question

1. Explain how and why each of the following factors would influence current aggregate demand in the United States:

(a) an increased fear of recession

(b) an increased fear of inflation

(c) the rapid growth of real income in Canada and Western Europe

(d) a reduction in the real interest rate

(e) a decline in housing prices

(f) a higher price level (be careful)

2. Which of the following would be most likely to shift the
long-run aggregate supply curve (LRAS) to the left?

a. unfavorable weather conditions that reduced the size of this year’s grain harvest

b. an increase in labor productivity as the result of improved computer technology and expansion in the Internet

c. an increase in the cost of security as the result of terrorist activities

3. How would an increase in the economy’s production possibilities influence the LRAS?

4. Suppose consumers and investors suddenly become more pessimistic about the future and therefore decide to reduce their consumption and investment spending. How will a market economy adjust to this increase in pessimism?

5. “If the general level of prices is higher than business
decision makers anticipated when they entered into
long-term contracts for raw materials and other
resources, profit margins will be abnormally low and
the economy will fall into a recession.”
– Is this statement true?

6. Which of the following would be most likely to throw the
U.S. economy into a recession?

(a) a reduction in transaction costs as the result of the growth and development of the Internet

(b) an unanticipated reduction in the world price of oil (will the impact of this factor differ between oil producing and oil consuming states?)

(c) an unanticipated reduction in AD as the result of a sharp decline in consumer confidence

7. During the first half of 2008, the world price of oil soared while stock and housing prices plunged. Within the framework of the AD-AS model, how would these two changes influence the U.S. economy? Explain the expected impact on output & price level.

8. When actual output is less than the economy’s full employment level of output, how will real resource prices and real interest rates adjust?

9. Construct the AD, SRAS, & LRAS curves for an economy experiencing:

(a) full employment equilibrium

(b) an economic boom

(c) a recession

Answer 1