Econ 201A - Assessment: AD/AS

b. If the price level increases, the amount of aggregate expenditures will _____________, which causes the quantity of real GDP demanded to ________________.

fall, decrease Explanation b. As the price level increases, we see that the amount of aggregate expenditures falls to a new line. When the level of aggregate expenditures falls, this causes the new aggregate expenditures line to intersect the AE = Y line at a lower level. Thus, the lower aggregate expenditures will cause the quantity of real GDP demanded to decrease.

Aggregate demand is best described as the relationship between the:

quantity of real GDP demanded in the economy and the price level. Explanation Aggregate demand is similar to the concept of demand; however, aggregate demand is the total quantity of all goods and services demanded in the economy. Therefore, aggregate demand represents the relationship between the quantity of real GDP demanded in the economy and the price level.

The following table shows the levels of real GDP that would be demanded in an economy at various price levels. Output at Different Price Levels Price Levels Real GDP Demanded 120 $1,000 110 $2,000 100 $3,000 90 $4,000 80 $5,000 70 $6,000 b. What is the quantity of real GDP demanded if the price level is 110?

Explanation b. To find the quantity of real GDP demanded if the price level is 110, you go down the "Price Level" column of the table until you reach 110. Then in the box next to it, in the "Quantity of Real GDP Demanded" column, you find the quantity of real GDP demanded at a price level of 110, which is $2,000.

The table below lists the aggregate expenditures schedule for various price levels. - See Picture Graph Aggregate Expenditures at Different Price Levels Instructions: Enter your answers as a whole number

Explanation To determine the equilibrium level of output for each price level, find the level where real output equals aggregate expenditures. a. Suppose the price level is 90. What is the equilibrium level of output? $ 50,000 b. Suppose the price level is 100. What is the equilibrium level of output? $ 40,000 c. Suppose the price level is 110. What is the equilibrium level of output? $ 30,000 d. Suppose the price level is 120. What is the equilibrium level of output? $ 20,000

The following table shows the levels of real GDP that would be demanded in an economy at various price levels. Output at Different Price Levels Price Levels Real GDP Demanded 120 $1,000 110 $2,000 100 $3,000 90 $4,000 80 $5,000 70 $6,000 a. Graph the aggregate demand curve. Instructions: Use the tool provided 'AD' to plot the aggregate demand curve point by point (6 points total).

Explanation a. Use the price level and quantity of real GDP demanded pairs in the table and plot a point for each set. For example, plot one point at a price level of 120 and a quantity of real GDP demanded of $1,000. Then plot a second point at a price level of 110 and a quantity of real GDP demanded of $2,000. Continue to do this for each pair listed in the table.

The long-run aggregate supply curve is vertical because: all input prices are flexible in the long run.

Explanation The long-run aggregate supply curve is vertical because all input prices are flexible in the long run. An increase in the price level will cause the cost of inputs to rise, and as the input prices adjust firms will not increase output as the price level increases. Therefore, output remains the same, but at a higher price.

Using the graphs below, show the change in aggregate demand for each of the following scenarios. a. There is a change in government policy that causes an increase in interest rates. Instructions: Use the tool provided 'AD1' to plot the new aggregate demand curve. Plot only the endpoints of the line (2 points total).

Explanation a. When there is an increase in interest rates, it makes it more expensive to borrow, so less borrowing will take place. For example, consumers will purchase fewer durable goods or firms will invest less in new capital. This will cause aggregate demand to decrease, and a decrease in aggregate demand is shown as a shift in the aggregate demand curve to the left. So, on the graph, using the line tool, a new AD curve should be drawn that has a negative slope but is to the left of the original AD curve.

Nation Furniture is a furniture manufacturing facility. Its workers just signed a two-year contract. The price level in the economy has increased. Answer the following set of questions based on the short run. a. If the price level increases, input prices will: remain constant b. If the price level increases, output prices will: increase c. In the short run, the firm will experience: an increase in economic profits

Explanation In the short run, firms have sticky input prices. This can be seen by the fixed wages that will be paid for two years to workers. However, firms do have the ability to change their output prices. As a result, revenues increase and costs remain constant. This will result in an increased economic profit for the firm.

The graph shows the current long-run aggregate supply at the full-employment level of output and the current aggregate demand for the United States. Use the graph provided to draw a short-run aggregate supply curve such that the short-run equilibrium point shows the U.S. economy in a short-run equilibrium with output at a level below the full-employment level of output. Instructions: Use the tool provided 'AS' to plot the short-run aggregate supply curve. Plot only the endpoints of the line (2 points total).

Explanation The LRAS curve shows the level of full-employment real GDP. In order for output or real GDP to be less than the full-employment level, it must fall to the left of the LRAS curve. With the AD curve and LRAS already given, to show the short-run equilibrium, we can draw the AS curve as an upward-sloping line—that is, a positive slope—and this line should be drawn so that it intersects both the AD curve and the LRAS curve. Because the problem asks for the SR equilibrium to be less than the full-employment level, the AS curve drawn needs to intersect or cross the AD curve at a point to the left of the LRAS curve. The SR equilibrium point can then be plotted at the intersection of the AD curve and the short-run AS curve that was drawn on the graph. This should show a line down to a new real GDP level that is less than or to the left of the LRAS curve and full-employment output.

For each of the following scenarios, determine the effect on aggregate supply. a. There is an unexpected decrease in oil prices. This causes: an increase in aggregate supply, shifting the aggregate supply curve to the right. b. The government increases the amount that all producers are required to contribute to health insurance coverage. This causes: a decrease in aggregate supply, shifting the aggregate supply curve to the left.

Explanation a. As oil prices decline, all producers will experience a decrease in the cost of production, as they will spend less on inputs using oil. When costs across the board decrease, it means producers can produce more goods and services at every price level. This will cause aggregate supply to increase. An increase in aggregate supply is shown as a shift in the aggregate supply curve to the right. b. As producers have to spend more to cover the cost of health insurance, all producers will experience an increase in the cost of production because they will spend more on labor inputs. When costs across the board increase, it means producers are able to produce fewer goods and services at every price level. This will cause aggregate supply to decrease. A decrease in aggregate supply is shown as a shift in the aggregate supply curve to the left.

Using the graphs below, show the change in aggregate supply for each of the following scenarios. a. Suppose there is a reduction in wages caused by an increase in the number of workers in the economy. Instructions: Use the tool provided 'AS1' to plot the new aggregate supply curve. Plot only the endpoints of the line (2 points total).

Explanation a. As wages decrease, producers can spend less on labor inputs and all producers will experience a decrease in the cost of production. When costs across the board decrease, it means producers can produce more goods and services at every price level. This will cause aggregate supply to increase. An increase in aggregate supply is shown as a shift in the aggregate supply curve to the right. So, on the graph, using the line tool, a new AS curve should be drawn that has a positive slope but is to the right of the original AS curve.

Determine whether the events below will cause the aggregate demand curve to shift to the left or to the right. Assume the price level remains constant. a. Government purchases increase by $2 billion. Aggregate demand shifts to the right. b. Real interest rates increase. Aggregate demand shifts to the left. c. Taxes increase. Aggregate demand shifts to the left. d. Aggregate consumption decreases as consumer confidence falls. Aggregate demand shifts to the left.

Explanation a. Government purchases increase by $2 billion. This will increase aggregate expenditures and aggregate demand shifts to the right. b. Real interest rates increase. This decreases the level of investment in an economy. This will decrease aggregate expenditures and aggregate demand shifts to the left. c. Taxes increase. This causes consumption in the economy to fall. This will decrease aggregate expenditures and aggregate demand shifts to the left. d. Aggregate consumption decreases as consumer confidence falls. This will decrease aggregate expenditures and aggregate demand shifts to the left.

Complete the following statements: a. In the short run, when the price level increases, the quantity of real GDP supplied will increase and the aggregate supply curve will not shift. b. In the short run, some prices are said to be sticky. This means some input prices remain constant as the price level changes.

Explanation a. In the short run, input prices tend to be sticky. When the price level increases, it causes total revenue to rise while some input costs do not increase. This makes firms more profitable, so they produce more output in the economy. As the price level increases and the quantity of real GDP supplied increases, there is a movement up and to the right on the AS curve. However, there is no change in aggregate supply—only a movement along the curve. Therefore, the aggregate supply curve will remain the same and will not shift. b. When input prices are sticky, it means that some input prices will remain constant even as the price level changes. This could be due to a variety of reasons including labor contracts or material price contracts.

a. The term stagflation refers to an economy: that is not growing but has inflation. b. Stagflation is the result of: a decrease in short-run aggregate supply. c. Which of the following events could cause stagflation? Steel and other raw materials increase in price.

Explanation a. Stagflation occurs when the price level and inflation are increasing at the same time that the level of real GDP is falling and unemployment is rising. No economic growth (stagnation) and inflation together are referred to as stagflation. b. Stagflation is the result of a decrease in the short-run aggregate supply curve. This causes the short-run equilibrium price level to increase and real GDP to decrease. c. The common cause of stagflation is an increase in resource costs, including steel, oil, and other inputs to production.

The following graph illustrates aggregate expenditures for the hypothetical economy of Mystaka. a. Use the information in the aggregate expenditures graph to plot the aggregate demand curve for Mystaka. Instructions: Use the tool provided 'AD' to plot the aggregate demand curve point by point (3 points total).

Explanation a. The aggregate expenditures graph shows the different levels of real GDP demanded for the different amounts of aggregate expenditures. As the price level changes, the amount of aggregate expenditures will change. Each aggregate expenditures line shows the amount of aggregate expenditures for each price level. At a price level of 80, aggregate expenditures intersect the AE = Y line at $240 million so that at P = 80, the level of real GDP demanded is $240 million. Because the aggregate demand curve shows the relationship between the price level and quantity of real GDP demanded, a price level of 80 and a quantity of real GDP demanded of $240 million would be a point on the AD curve. Therefore, we can plot the point P = 80 and real GDP demanded of $240 million as the first point on the AD curve. At a price level of 100, aggregate expenditures intersect the AE = Y line at $160 million so that at P = 100, the level of real GDP demanded is $160 million. This means a price level of 100 and a quantity of real GDP demanded of $160 million would be a point on the AD curve. Therefore, we can plot the point P = 100 and real GDP demanded of $160 million for the second point on the AD curve. At a price level of 120, aggregate expenditures intersect the AE = Y line at $80 million so that at P = 120, the level of real GDP demanded is $80 million. This means a price level of 120 and a quantity of real GDP demanded of $80 million would be a point on the AD curve. Therefore, we can plot the point P = 120 and real GDP demanded of $80 million for the third point on the AD curve. These three points would create and represent the AD curve.

Assume the economy is initially in both short-run and long-run equilibrium, as shown in the graph below. Instructions: Enter your answers as a whole number. a. What is the equilibrium? A price level of 95 and real GDP of $25 billion b. Suppose the expected rates of return in the economy increase in the short run. Which curve will shift as a result? Aggregate demand c. Compared to the initial equilibrium, the new, short-run equilibrium will result in a: higher price level and increased real GDP d. What is the result of the shift to the new, short-run equilibrium? Demand-pull inflation

Explanation a. The initial equilibrium occurs at the intersection of the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves. This occurs at a price level of 95 and real GDP of $25 billion. b. If the expected rates of return in the economy increase, investment demand will increase. The increase in investment will cause a shift to the right in the aggregate demand curve. c. The new, short-run equilibrium, where the new aggregate demand curve intersects the short-run aggregate supply curve, will be at a higher price level and increased level of real GDP relative to the initial equilibrium. d. The increased price level caused by the shift in the aggregate demand curve was caused by demand-pull inflation.

The following table shows the levels of real GDP supplied for the country of Utopia at various price levels. Utopia's Output at Various Price Levels Output at Different Price Levels Price Levels Real GDP Demanded 100 $160 90 $140 80 $120 70 $100 60 $80 50 $60 a. Graph the aggregate supply curve. Instructions: Use the tool provided 'AS' to plot the aggregate supply curve point by point (6 points total).

Explanation a. Use the price level and quantity of real GDP supplied pairs in the table and plot a point for each set. For example, plot one point at a price level of 50 and a quantity of real GDP supplied of $60 billion, then plot a second point at a price level of 60 and a quantity of real GDP supplied of $80 billion, followed by a third point at a price level of 70 and a quantity of real GDP supplied of $100 billion. Continue to do this for each pair listed in the table.

Ireland's economy is in both short-run and long-run equilibrium, as shown in the graph below. Assume the countries of OPEC enter into a price war, causing the price of oil to decrease. a. Show the effect on the short-run equilibrium from a decrease in oil prices. Using the graph, draw either the new AD curve or new AS curve resulting from this price change. Instructions: Use the tool provided 'New Curve' to plot the appropriate line. After placing the curve, click on 'Select' and choose whether to label the curve 'AD1' or 'AS1' from the dropdown menu.

Explanation a. When oil prices decrease, it will decrease the costs of production to firms in the economy. As the costs of production decrease, firms can produce goods and services at a lower cost, which increases aggregate supply and causes the AS curve to shift to the right. This will require using the 'New Curve' tool to draw a new, upward-sloping AS curve to the right of the original AS curve. After drawing the curve, label it AS1 to indicate that it was a shift in AS from one of the aggregate supply factors. Since the AS1 curve is to the right of the original AS curve, the new SR equilibrium will show a new price level lower than the original price level and a new level of real GDP that is greater than the full-employment level at the LRAS.

The U.S. economy is in both short-run and long-run equilibrium, as shown in the graph below. Assume the federal government decides to decrease personal income taxes. a. Show the effect on the short-run equilibrium as a result of the decrease in taxes. Using the graph, draw either the new AD curve or new AS curve resulting from this change. Instructions: Use the tool provided 'New Curve' to plot the appropriate line. After placing the curve, click on 'Select' and choose whether to label the curve 'AD1' or 'AS1' from the dropdown menu.

Explanation a. When the government decreases taxes, it will raise the amount of disposable income in the economy. As disposable income increases, the level of consumption expenditures will increase, which impacts aggregate demand and causes the AD curve to shift to the right. This will require using the 'New Curve' tool to draw a new downward-sloping AD1 curve to the right of the original AD curve. After drawing the curve, label it AD1 to indicate a shift in AD from one of the aggregate demand factors. Since the AD1 curve is to the right of the original AD curve, the new SR equilibrium will show a new price level greater than the original price level and a new level of real GDP that is greater than the full-employment level at the LRAS.

The graph below shows the long-run aggregate supply curve for the country of Utopia. a. If the price level rises from 100 to 120, real GDP will: remain the same. Now suppose that Utopia experiences an increase in capital from previous investment. b. Using the graph above, draw a new long-run aggregate supply curve for Utopia showing this increase in capital. Instructions: Use the tool provided 'LRAS1' and plot only the endpoints such that the first point touches the horizontal axis (2 points total).

Explanation a. When the price level increases from 100 to 120, it only moves the point up the LRAS curve. There is no change in output in the long run from the price increase, so real GDP does not change. b. An increase in capital will increase an economy's ability to produce goods and services. As the economy's productivity increases, it raises the full-employment level of real GDP. This is shown as an increase in LRAS, and the LRAS curve will shift to the right. To show this on the graph, use the line tool and place a vertical line to the right of the original LRAS curve.

b. As a result of production decisions by OPEC, the price of oil increases for producers. Instructions: Use the tool provided 'AS1' to plot the new aggregate supply curve. Plot only the endpoints of the line (2 points total).

Explanation b. As oil prices increase, all producers will experience an increase in the cost of production, since they will spend more on inputs using oil. When costs across the board increase, it means producers are able to produce fewer goods and services at every price level. This will cause aggregate supply to decrease. A decrease in aggregate supply is shown as a shift in the aggregate supply curve to the left. So, on the graph, using the line tool, a new AS curve should be drawn that has a positive slope but is to the left of the original AS curve.

b. After the election, consumers begin to feel optimistic about the future of the economy, which causes an increase in consumer confidence. Instructions: Use the tool provided 'AD1' to plot the new aggregate demand curve. Plot only the endpoints of the line (2 points total).

Explanation b. As the economy experiences an increase in consumer confidence, people will increase spending on goods and services. This increase in spending will increase the amount of goods and services purchased at every price level, causing aggregate demand to increase. An increase in aggregate demand is shown as a shift in the aggregate demand curve to the right. So, on the graph, using the line tool, a new AD curve should be drawn that has a negative slope but is to the right of the original AD curve.

In the long run, the short-run aggregate supply curve will shift to the left, causing the price level to rise and real GDP to decrease, bringing the economy back to the long-run equilibrium at the full-employment level of output.

Explanation b. Because the decrease in oil prices is a short-run effect, oil prices will rise back to their original level. As oil prices begin to rise again and move the costs of production up, it will cause an increase in the short-run aggregate supply so that the short-run AS curve will decrease or shift back to the left. When the short-run AS curve shifts to the left (back to the original level), the price level will rise back to the original, higher price level. This will cause the amount of real GDP to fall. Therefore, when moving from the new, short-run equilibrium with output greater than the full-employment level to the original, long-run equilibrium, real GDP will have to decrease to move back to the full-employment level of output.

b. In the long run, the short-run aggregate supply curve will shift to the left, causing the price level to rise and real GDP to decrease, bringing the economy back to the long-run equilibrium at the full-employment level of output.

Explanation b. Because the increased AD causes firms to increase production, prices and costs of production will begin to rise. As this occurs, increased demand for labor will cause wages to increase, further it will cause a decrease in the short-run aggregate supply so that the short-run AS curve will shift to the left. When the short-run AS curve shifts to the left, the price level will rise to a higher price level, and this will cause the amount of real GDP to fall. Therefore, when moving from the new short-run equilibrium with output greater than the full-employment level to the new long-run equilibrium, real GDP will have to decrease to move back to the full-employment level of output.

b. If the price level rises from 60 to 80, the quantity of real GDP supplied will increase by $40 billion.

Explanation b. If the price level rises from 60 to 80, you will need to find the quantity of real GDP supplied at a price level of 60, which is $80 billion, and the quantity of real GDP supplied at a price level of 80, which is $120 billion. Then you take the difference between these two quantities of real GDP supplied, which is $120 billion - $80 billion = $40 billion. Because the price level increases, people will demand a smaller quantity of total output and producers will supply a larger quantity. Therefore, the quantity of real GDP supplied will increase by $40 billion.

e. Use the information above to determine the aggregate demand curve. - See Picture Graph on card 6 Instructions: Use the tool provided 'AD' to plot the aggregate demand curve point by point (4 points total).

Explanation e. Plot these points to view the downward-sloping aggregate demand curve.