Question

The following events are occurring in the macroeconomy for all U.S.

for 1 through 5 answers the following- a)Aggregate Demand/and or aggregate supply b) if it shifts left or right c) if the macro equilibrium increases decrease or cannot be determined. D) Macroequilibrium real GDP increases, or cannot be determined

1) The value of the dollar has sky-rocketed in international currency markets, As a result, Corciyners are buying less American goods/services shifts

2.) In recent years, OPEC has lowered the price of its oil, a factor of production, significantly

3.) Interest rates are starting to creep up which increases the cost of borrowing for businesses and consumers. shifts

4.) Due to extreme weather, US farmers are producing less

5.) The Trump administration has increased tariffs on Chinese products, and, at the same time, relaxes environmental regulations imposed on firms.

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Suppose the consumption function for the nation is as follows: C= $400 billion +0.75Yd 6).

6.) how much will aggregate demand increase if the government increases purchases by $2 billion?

7) How much will aggregate demand increase if the government increases income transfers by $40 billion?

Answer 1

(1)

Increase in dollar value (appreciation) will decrease exports and increase imports, reducing net exports and aggregate demand.

AD curve will shift to left, decreasing price level and decreasing real GDP.

(2)

Lower price of oil, an input, will increase firm output and aggregate supply.

AS curve will shift to right, decreasing price level and increasing real GDP.

(3)

Higher cost of borrowing decreases investment and aggregate demand.

AD curve will shift to left, decreasing price level and decreasing real GDP.

(4)

Bad weather will decrease farm output and aggregate supply.

AS curve will shift to left, increasing price level and decreasing real GDP.

(5)

Higher import tariff, reduces imports, increasing net exports and aggregate demand. AD curve will shift to right, increasing price level and increasing real GDP.

At the same time, relaxed regulations will decrease cost of business, which will increase firm output and aggregate supply. AS curve will shift to right, decreasing price level and increasing real GDP.

The net effect is a definite increase in real GDP. But effect in price level is indeterminate.

(6)

Spending multiplier = 1 / (1 - MPC) = 1 / (1 - 0.75) = 1/0.25 = 4

Increase in AD ($ billion) = Increase in G x Spending multiplier = 2 x 4 = 8

(7)

Transfer payments multiplier = MPC / (1 - MPC) = 0.75 / (1 - 0.75) = 0.75/0.25 = 3

Increase in AD ($ billion) = Increase in transfer payments x Transfer payments multiplier = 40 x 3 = 120