Question

Part 1: understanding the AS-AD framework

Understand how aggregate supply and aggregate demand determine macroeconomic equilibrium.

1) Draw AD and AS curves where macroeconomic equilibrium occurs at an output of $25 trillion. On your graph, indicate the equilibrium price level (you can assign an exact value). Indicate on the graph where macroeconomic equilibrium occurs. Make sure to label each part of the graph.

Part 2: applying the AS-AD framework

Evaluate the forces that shape the total quantity of goods and services that purchasers want to buy.

Evaluate the forces that shape the total quantity of goods and services that businesses want to supply.

2-1) For each of the following, using a graph to show the shift in aggregate demand and explain your reasoning.

a) How do poor numbers from several economic indicators (for example, today the retail sales for March 2020 were much lower and the manufacturing numbers were also lower) affect businesses?

b) Congress passes the relief package of $2 trillion dollars (Payment Protection Plan) and the Fed promised to add additional $2.3 trillion dollars the payments.

c) The U.S. government eliminates the tariffs it charges on goods imported from China (like recently medical supplies).

2-2) Illustrate how each of the following will impact aggregate supply and explain your reasoning.

a) The implementation of artificial intelligence in manufacturing.

b) The novel Coronavirus has put tens of millions workers out of work.

c) The U.S. dollar depreciates relative to the Chinese yuan.

2-3) Forecast how the economy will respond to changing conditions.

a) To combat the current recession, the U.S. government enacts expansionary fiscal policy (well, although the U.S. did announce some infrastructure projects, the example here isn't really a fact, I'm making up this policy for you to practice with the model.), which increase government spending by $2 trillion dollars. Illustrate the impact of this expansionary fiscal policy on the U.S. economy using an AS-AD graph. How will the price level change?

b) The Fed quickly announced a rate cut (the federal funds rate) to basically zero on March 13 amid concerns of a looming recession due to the novel Coronavirus. And the latest data on consumer confidence and business confidence dropped significantly. Forecast how prices and output will change by drawing an AS-AD graph, and explain your answers.

I dont know what type of "reference" is needed, but this is all the information included in the question. There is nothing more to go along with it. It's possible the question was just made incomplete though. I'm not sure.

Answer 1

Question 1 answered.

1. Figure drawn below.Real GDP at equilibrium of long run aggregate supply is $25 trillion. Price level is P1. Equilibrium level is at AD-AS intersection. (Aggregate demand-aggregate supply).

Forces that determine AD:

Aggregate demand is total demand in an economy at a specific average price levels. It is negatively sloping and as shown in the figure below, when average price levels go up(from a to b) then economy contracts and less real GDP is produced. When average price levels go down (from a to c) then economy expands and more real GDP is produced.

Aggregate demand curve is negatively sloping due to three factors: wealth effect, interest rate effect and International trade effect.

When average price levels go up then people have less money to spend and hence aggregate demand goes down. Also when average price levels gap up then more money is needed ti buy and hence people borrow more and interest rates go up and then aggregate demand contracts. When average price rises then less of products are demanded from this country and hence again economy contracts.

Aggregate demand curve is shifted to right or left through a combination of factors:

C+I+G+(X-M)

where C= Consumption expenditure

I= Investment expenditure

G= Government expenditure

Net exports = exports -imports.

If these factors increase then AD shifts right and if these decrease then AD shifts left.

Forces that determine AS:

Aggregate supply is determined by costs, profit.

If costs are more then aggregate supply shifts left. Taxes, rise in wages make AS shift left. If business profits are rising then aggregate supply will be more as businesses expext more profits then. Spare capacity also makes supply more.