Macroeconomic question

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Answer following question, some of them needs to draw graphs. Powerpoint of the chapters are provided. Please show all the works and be specific. Thank you.

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SECTION ONE: This question is from the material you learned in chapter 8. a) Please complete the table I have provided in trillion dollars . The mps =0.2 DI (t) C (t) S (t) $0 2 2 4 6 8 10 12 14 b) What is the dollar value of autonomous consumption? c) What is the value of the mpc? Show. d) What value shows equilibrium (cf crosses 45 degree line)? e) Draw a consumption function diagram showing equilibrium. Type equilibrium numbers. f) Draw a saving function showing equilibrium. Type equil. Number g) Find and show the value of the multiplier. h) Now, assume $1t of autonomous investment spending occurs. What is the new equilibrium value? EXPLAIN. SECTION TWO: A. Calculate (approximately) how many years it will take for real GDP to double in each of the following cases. i. The growth rate of China is 8% ii. The growth rate of Brazil is 5% B. In the following question (Be sure to label all diagrams appropriately for full credit) TYPE answers. i. Draw a supply and demand diagram of the labor market. Assume that immigration laws are relaxed causing immigrants to flow in to the country. Add to drawing. Label everything. ii. Further, draw a diagram of the production function. Show on the diagrams what will happen to Real GDP as a result of the immigration policy. Show on the production function. Production function should show relationship of labor to output. (Be sure to label the diagram appropriately for full credit). iii. Explain in words what your diagrams show. Here you will TYPE your explanation of the two curves. Credit for the above two parts will not be given without this inclusion. C. All at once the technology of the internet and cell phones are introduced to a developing country. i. Show this impact on the production function. (Draw a before and after on the same graph). Discuss in words (typed). ii. What will happen to productivity when the new technology is introduced? What do we use to show that productivity has gone up? Explain, in words, what is meant by an increase in productivity. SLIDES CREATED BY ERIC CHIANG PORTLAND PRESS HERALD / GETTY IMAGES 19 Aggregate Expenditures CHAPTER 19 SLIDE 1 CHAPTER OBJECTIVES  Name the components of aggregate spending.  Analyze the relationship between consumption and income using a basic aggregate expenditures graph.  Analyze consumption and saving using marginal propensity to consume (MPC) and marginal propensity to save (MPS).  Describe the determinants of consumption, saving, and investment.  Determine macroeconomic equilibrium in the simple aggregate expenditures model of the private domestic economy.  CHAPTER 19 SLIDE 2 CHAPTER OBJECTIVES  Explain the multiplier process, how it is computed, and why it operates in both directions.  Describe macroeconomic equilibrium in the full aggregate expenditures model when government and the foreign sectors are added.  Explain why, at equilibrium, injections equal withdrawals in the economy.  Describe the differences between recessionary and inflationary gaps. CHAPTER 19 SLIDE 3 CHAPTER 19 SLIDE 4 MOLIMA/DREAMSTIME.COM THE CLASSICAL MODEL Pre-1930s mainstream economic thought argued that:  a laissez-faire (leave it alone) approach was best for the economy.  the economy was self-correcting; it always adjusted to full employment by the forces of demand and supply.  prices, wages, and interest rates were flexible. CHAPTER 19 SLIDE 5 THE GREAT DEPRESSION The prolonged downturn challenged the classical perspective:  John Maynard Keynes argued that government has an important role in stabilizing a distressed economy.  Keynesians argued that prices and wages were sticky, or slow to adjust.  Keynes published The General Theory… in 1936. CHAPTER 19 SLIDE 6 JOHN MAYNARD KEYNES (1883–1946) Known as the father of macroeconomics. Launched a critique of classical economics by focusing on spending as the key to growth. His writings still influence economic policy (e.g., stimulus policies). CHAPTER 19 SLIDE 7 AGGREGATE EXPENDITURES  Consist of the components of GDP that are measured by spending: GDP = AE = C + I + G + (X − M)  Consumption (C) is the largest component, representing nearly 70% of GDP. Consumption is the key factor in the AE model. CHAPTER 19 SLIDE 8 YURI ARCURS/AGE FOTOSTOCK CONSUMPTION IS THE PORTION OF INCOME NOT SAVED: INCOME = C + S. CHAPTER 19 SLIDE 9 KEYNESIAN CONSUMPTION FUNCTION CONSUMPTION (thousands) 6 Y=C+S C 5 4 a 3 Saving is negative to the left of point a and positive to the right of point a. 2 1 1 2 3 4 5 6 INCOME (thousands) CHAPTER 19 SLIDE 10 KEYNESIAN CONSUMPTION FUNCTION  Consumption spending grows as income grows but not as fast.  As income rises, savings rise as a percentage of income.  Classical economists believe that interest rates determine saving, while Keynesians believe that income determines saving. CHAPTER 19 SLIDE 11 AVERAGE PROPENSITY TO CONSUME (APC) AND SAVE (APS) APC APS PERCENTAGE OF INCOME THAT IS USED FOR CONSUMPTION (C / Y) PERCENTAGE OF INCOME THAT IS SAVED (S / Y)  Because Y = C + S, APC + APS = 1. CHAPTER 19 SLIDE 12 MARGINAL PROPENSITY TO CONSUME (MPC) AND SAVE (MPS) MPC THE CHANGE IN CONSUMPTION GIVEN A CHANGE IN INCOME (ΔC/ΔY) MPS THE CHANGE IN SAVING GIVEN A CHANGE IN INCOME (ΔS/ΔY)  Because Y = C + S, MPC + MPS = 1 CHAPTER 19 SLIDE 13 OTHER DETERMINANTS OF CONSUMPTION Income is the principal determinant of consumption and saving, but other factors can shift the consumption and saving schedules:  Wealth  Expectations about future prices and income  Household debt  Taxes CHAPTER 19 SLIDE 14 FRENC/DREAMSTIME.COM INVESTMENT IS SPENDING BY BUSINESSES THAT ADDS TO THE PRODUCTIVE CAPACITY OF THE ECONOMY. CHAPTER 19 SLIDE 15 THE INSTABILITY OF INVESTMENT Gross private domestic investment is much more volatile than consumption spending. CHAPTER 19 SLIDE 16 INVESTMENT DEMAND  Investment levels depend primarily on the rate of return on capital.  Investments earning a high rate of return are those undertaken first.  Interest rates also affect investment because most business investment is financed.  As interest rates fall, investment rises. CHAPTER 19 SLIDE 17 OTHER DETERMINANTS OF INVESTMENT Investment demand also depends on:  expectations about future revenues and return on investment.  technological change.  operating costs.  capital goods on hand. CHAPTER 19 SLIDE 18 INVESTMENT SPENDING (I) AGGREGATE INVESTMENT SCHEDULE Investment spending is autonomous (independent) of income. I I0 1 2 3 4 5 6 INCOME (Y) CHAPTER 19 SLIDE 19 SIMPLE AGGREGATE EXPENDITURES MODEL Leaving out the government and foreign sectors, we ask the following questions:  WHAT IS THE MACROECONOMIC  EQUILIBRIUM? WHAT CHANGES THE  EQUILIBRIUM? HOW MUCH WILL THE ECONOMY PRODUCE? CHAPTER 19 SLIDE 20 THE TWO COMPONENTS IN THE SIMPLE AE MODEL (AE = C + I) CONSUMPTION ALMOST 70% OF AGGREGATE SPENDING: LARGE AND STABLE INVESTMENT ABOUT 15% OF AGGREGATE SPENDING: VOLATILE AND SENSITIVE TO ECONOMIC CONDITIONS CHAPTER 19 SLIDE 21 SAVING & INVESTMENT AGGREGATE EXPENDITURES SIMPLE AGGREGATE EXPENDITURES MODEL Y = AE AE = C + I0 C 5,500 5,000 e 4,500 f 4,000 a 3,500 3,000 500 3,500 4,000 4,500 5,000 S 250 e 100 I0 a 0 3,500 4,000 4,500 5,000 Point a in both panels represents zero saving (income equals consumption). If AE rises by $100, equilibrium income rises by $400, where S = I. INCOME (Y) CHAPTER 19 SLIDE 22 MACROECONOMIC EQUILIBRIUM  The economy is at equilibrium where injections of spending (investment) equal withdrawals (saving), or: I=S  At this point, there is no reason for the economy to change its level of output or income. CHAPTER 19 SLIDE 23 CHAPTER 19 SLIDE 24 THE MULTIPLIER EFFECT  Occurs when an initial amount of spending causes income to grow by a larger amount  The multiplier is calculated as: 1 / (1 − MPC)  The greater the MPC, the higher the spending multiplier. CHAPTER 19 SLIDE 25 MULTIPLIER IN ACTION (MPC = 0.8) $100 CASH SPEND SAVE $80 SPEND $64 SPEND SAVE $51.20 $12.80 $20 SAVE $16 AND SO ON… CHAPTER 19 SLIDE 26 THE MULTIPLIER EFFECT  The total potential effect on income equals the initial change in spending times the multiplier.  When MPC = 0.8, the potential increase in income from a $100 increase in spending is $100  5 = $500. Saving will also increase by $100. CHAPTER 19 SLIDE 27 SAVING AND INVESTMENT SAVING AND INVESTMENT S b 200 I1 = 100 e I0 = 100 100 0 −100 −200 3.6 4.0 4.4 4.8 5.2 INCOME (thousands) An increase in investment of $100 creates more than a $100 increase in income. In this case, $100 turns into a $400 rise in income (from point e to b). CHAPTER 19 SLIDE 28 IMAGE SOURCE/CORBIS THE SPENDING MULTIPLIER ALLOWS US TO DETERMINE HOW MUCH SPENDING IS NEEDED TO BOOST INCOME TO A SPECIFIC LEVEL. CHAPTER 19 SLIDE 29 THE MULTIPLIER WORKS IN BOTH DIRECTIONS  A decrease in spending during an economic downturn can cause a larger drop in income. If consumers increase their saving during a recession, they may inadvertently make the recession worse because of the multiplier. CHAPTER 19 SLIDE 30 CONSUMPTION AND SAVING DURING THE 2007–2009 RECESSION CHAPTER 19 SLIDE 31 KOOBOOKI/THINKSTOCK PARADOX OF THRIFT: IF HOUSEHOLDS SAVE MORE, THE MULTIPLIER EFFECT LEADS TO REDUCED INCOME, LEADING TO LESS SAVING. CHAPTER 19 SLIDE 32 XIYE/DREAMSTIME.COM THE FULL AGGREGATE EXPENDITURES MODEL TAKES ALL SPENDING COMPONENTS INTO ACCOUNT: C + I + G + (X − M) CHAPTER 19 SLIDE 33 SPENDING INJECTIONS INJECTIONS INCLUDE INVESTMENT (I), GOVERNMENT SPENDING (G), AND EXPORTS (X). SPENDING WITHDRAWALS WITHDRAWALS INCLUDE SAVINGS (S), TAXES (T), AND IMPORTS (M). In a macroeconomic equilibrium: I+G+X=S+T+M CHAPTER 19 SLIDE 34 SAVING, INVESTMENT, GOVERNMENT SPENDING SAVING, INVESTMENT, AND GOVERNMENT SPENDING S b 200 I+G e I 100 0 −100 −200 3.6 4.0 4.4 4.8 5.2 INCOME (thousands) An increase of $100 in government spending has the same effect on income as an increase in investment. Both are injections to the economy. CHAPTER 19 SLIDE 35 SAVING, INVESTMENT, GOVERNMENT SPENDING SAVING, INVESTMENT, GOVERNMENT SPENDING, AND TAXES S+T S g I+G 200 b e I 100 0 −100 −200 3.6 4.0 4.4 4.8 5.2 INCOME (thousands) Taxes have less direct impact on income than an equivalent change in government spending because some of a tax is paid using savings, both of which are withdrawals. CHAPTER 19 SLIDE 36 THE BALANCED BUDGET MULTIPLIER  Equal changes in government spending and taxation lead to an equal change in income.  If a $1 billion increase in spending is financed by a $1 billion tax increase, GDP rises $1 billion regardless of the MPC. THE BALANCED BUDGET MULTIPLIER IS ALWAYS 1. CHAPTER 19 SLIDE 37 ERIC CHIANG THE FOREIGN SECTOR IN THE KEYNESIAN MODEL IS ADDED THROUGH NET EXPORTS: EXPORTS MINUS IMPORTS (X − M). CHAPTER 19 SLIDE 38 SAVING, INVESTMENT, GOVERNMENT SPENDING SAVING, INVESTMENT, GOVERNMENT SPENDING, AND NET EXPORTS S c 300 b 200 I+G e I 100 0 −100 −200 3.6 4.0 4.4 I + G + (X − M) 4.8 5.2 INCOME (thousands) If exports exceed imports, AE rises and equilibrium income rises. If imports exceed exports, AE falls and equilibrium income falls. CHAPTER 19 SLIDE 39 RECESSIONARY GAP THE INCREASE IN AGGREGATE SPENDING NECESSARY TO BRING A DEPRESSED ECONOMY BACK TO FULL EMPLOYMENT  This is not the total deficiency in GDP, which is called the GDP gap. The recessionary gap is the spending needed to close the GDP gap when boosted by the multiplier. CHAPTER 19 SLIDE 40 INFLATIONARY GAP THE DECREASE IN AGGREGATE SPENDING NECESSARY TO BRING AN OVERHEATED ECONOMY BACK TO FULL EMPLOYMENT  Inflationary pressures occur when an economy produces output above full employment. Excess spending results in higher prices, which can lead to other economic problems. CHAPTER 19 SLIDE 41 THE GREAT DEPRESSION  At the height of the Great Depression, unemployment was 25% and the stock market fell 85%.  Keynes argued for a significant increase in government spending.  In the early 1940s, government spending rose 10 times for WWII, and the Great Depression ended. CHAPTER 19 SLIDE 42 KEY CONCEPTS • • • • • • • • Aggregate expenditures Consumption Saving Average propensity to consume Average propensity to save Marginal propensity to consume Marginal propensity to save Investment • Keynesian macroeconomic equilibrium • Injections • Withdrawals • Multiplier • Paradox of thrift • Balanced budget multiplier • Recessionary gap • Inflationary gap CHAPTER 19 SLIDE 43 IF THE MPC = 0.8 AND INCOME RISES BY $5,000, WHAT IS THE INCREASE IN CONSUMPTION? A $625 B $1,000 C $4,000 D $5,000 E $6,250 CHAPTER 19 SLIDE 44 SUE ASHE/SHUTTERSTOCK PRACTICE QUESTION EXPLAIN HOW THE RECOVERY IN NEW HOUSING CONSTRUCTION WILL AFFECT THE ECONOMY AS A RESULT OF THE MULTIPLIER EFFECT. CHAPTER 19 SLIDE 45 WHICH OF THE FOLLOWING STATEMENTS CONCERNING CONSUMPTION IS INCORRECT? A WEALTHY PEOPLE CONSUME MORE THAN OTHER PEOPLE. B EXPECTATIONS ABOUT FUTURE PRICES AFFECT CONSUMPTION. C TAX INCREASES REDUCE CONSUMPTION. D SAVINGS RATES DECREASE AS INCOME INCREASES. CHAPTER 19 SLIDE 46 WHAT WAS THE RATIONALE FOR CONGRESS AND THE PRESIDENT TO PASS A HUGE STIMULUS (SPENDING) PACKAGE IN 2009? CHAPTER 19 SLIDE 47 OLIVIER LE QUEINEC/DREAMSTIME.COM PRACTICE QUESTION IF THE MULTIPLIER IS 4, GOVERNMENT SPENDING RISES BY $200, AND TAXES INCREASE BY $200, EQUILIBRIUM INCOME WILL: A FALL BY $200. B FALL BY LESS THAN $200. C NOT CHANGE. D RISE BY $200. E RISE BY MORE THAN $200. CHAPTER 19 SLIDE 48 END OF CHAPTER SLIDES CREATED BY ERIC CHIANG 19 Tshooter/Shutterstock; Anton Balazh/Shutterstock CHAPTER 19 SLIDE 49 SLIDES CREATED BY ERIC CHIANG SUBBOTINA/DREAMSTIME.COM 20 Aggregate Demand and Supply CHAPTER 20 SLIDE 1 CHAPTER OBJECTIVES  Explain what an aggregate demand curve is and what it represents.  Describe why the aggregate demand curve has a negative slope due to the wealth, export, and interest rate effects.  List the determinants of aggregate demand.  Analyze the aggregate supply curve and differentiate between the short run and long run.  CHAPTER 20 SLIDE 2 CHAPTER OBJECTIVES  Describe the determinants of an aggregate supply curve.  Use AD/AS analysis to illustrate long-run and short-run macroeconomic equilibrium.  Define the multiplier and describe why it is important.  Describe demand-pull and cost-push inflation. CHAPTER 20 SLIDE 3 ORIGINS OF MACROECONOMICS John Maynard Keynes originated macroeconomic theory. At that time:  industrial capacity was unused.  unemployment was high.  businesses were not investing. In that situation, it was possible to expand output and employment by generating productive activity. CHAPTER 20 SLIDE 4 SEAN PAVONE/ALAMY THE AGGREGATE DEMAND CURVE SHOWS THE OUTPUT OF GOODS AND SERVICES (REAL GDP) DEMANDED AT DIFFERENT PRICE LEVELS. CHAPTER 20 SLIDE 5 AGGREGATE PRICE LEVEL (P) AGGREGATE DEMAND A higher aggregate price causes lower aggregate output. P1 Aggregate demand slopes down because of the wealth effect, export price effect, and a interest rate effect. b P0 AD0 0 Q1 Q0 AGGREGATE OUTPUT (Q) CHAPTER 20 SLIDE 6 AGGREGATE DEMAND Wealth effect: As prices rise, purchasing power of wealth falls, reducing consumption. Export price effect: As prices rise, exports become more expensive, and exports drop. Interest rate effect: As prices rise, people hold more money, pushing interest rates higher, reducing business investment. CHAPTER 20 SLIDE 7 DETERMINANTS OF AGGREGATE DEMAND The determinants of aggregate demand are factors that shift the entire AD curve when they change:  Consumption  Investment  Government spending  Net exports CHAPTER 20 SLIDE 8 AGGREGATE PRICE LEVEL (P) SHIFTS IN AGGREGATE DEMAND P1 A factor that shifts aggregate demand to the right will increase output at every price level. b a P0 AD1 AD0 0 Q1 Q0 Q2 AGGREGATE OUTPUT (Q) CHAPTER 20 SLIDE 9 LEE SNIDER/DREAMSTIME.COM CONSUMER SPENDING IS AFFECTED BY FOUR MAJOR FACTORS BESIDES INCOME: WEALTH, CONSUMER CONFIDENCE, DEBT, AND TAXES. CHAPTER 20 SLIDE 10 CHAPTER 20 SLIDE 11 ISTOCKPHOTO/THINKSTOCK INVESTMENT IS DETERMINED BY INTEREST RATES, EXPECTED RATE OF RETURN ON INVESTMENT, AND BUSINESS EXPECTATIONS. US NAVY PHOTO/ALAMY GOVERNMENT SPENDING IS DETERMINED BY FEDERAL, STATE, AND LOCAL LAWMAKERS. CHAPTER 20 SLIDE 12 ERIC CHIANG NET EXPORTS ARE DETERMINED PRIMARILY BY FOREIGN INCOME AND EXCHANGE RATES. CHAPTER 20 SLIDE 13 SUMMARY OF AGGREGATE DEMAND CHAPTER 20 SLIDE 14 CHAPTER 20 SLIDE 15 ZUMA PRESS, INC/ALAMY THE AGGREGATE SUPPLY CURVE SHOWS THE REAL GDP THAT FIRMS WILL PRODUCE AT VARYING PRICE LEVELS. LONG-RUN AGGREGATE SUPPLY  In the long run, the aggregate supply curve is vertical.  This incorporates the approach of classical economic analysis, which assumed that all variables are adjustable in the long run. In the long run, the economy will gravitate toward full employment. CHAPTER 20 SLIDE 16 LONG-RUN AGGREGATE SUPPLY AGGREGATE PRICE LEVEL (P) LRAS0 LRAS1 A shift in the long-run aggregate supply curve moves the economy to a new long-run equilibrium output. 0 Q0 Q1 AGGREGATE OUTPUT (Q) CHAPTER 20 SLIDE 17 SHIFTING THE LRAS CURVE  The position of the LRAS curve depends on the economy’s capacity:  Amount of available resources  The quality of the labor force  Available technology Full employment occurs at the natural rate of unemployment. CHAPTER 20 SLIDE 18 SHIFTING THE LRAS CURVE  Rightward shifts in LRAS occur when:  technology improves: automation, digitalization.  labor quality is enhanced; more people pursue higher education.  trade and globalization increase. Shifts of the LRAS curve take time. CHAPTER 20 SLIDE 19 SHORT-RUN AGGREGATE SUPPLY  In the short run, the aggregate supply curve is upward sloping.  Some input prices (such as wages) are slow to change; they are sticky.  When prices rise but input prices are sticky, profits increase and firms produce more, resulting in a short-run increase in aggregate output. CHAPTER 20 SLIDE 20 SHORT-RUN AGGREGATE SUPPLY AGGREGATE PRICE LEVEL (P) SRAS SRAS is positively sloped because input costs are slow to change. (They are sticky.) 0 AGGREGATE OUTPUT (Q) CHAPTER 20 SLIDE 21 DETERMINANTS OF SRAS The determinants of the short-run aggregate supply curve are:  changes in input prices.  technology and productivity.  taxes and regulation.  market power of firms.  inflationary expectations. CHAPTER 20 SLIDE 22 AGGREGATE PRICE LEVEL (P) SHIFTS OF THE SRAS CURVE SRAS0 SRAS1 P0 0 a b Q0 Q1 A factor that shifts SRAS to the right will increase aggregate output at every price level. AGGREGATE OUTPUT (Q) CHAPTER 20 SLIDE 23 IMAGINECHINA/CORBIS A LARGE RISE IN COPPER PRICES FROM 2006 TO 2012 CONTRIBUTED TO A DECREASE IN AGGREGATE SUPPLY. CHAPTER 20 SLIDE 24 LOU LINWEI/ALAMY RISING PRODUCTIVITY INCREASES PROFITS AND INCREASES SHORT-RUN AGGREGATE SUPPLY. CHAPTER 20 SLIDE 25 TAXES AND REGULATION ADD TO THE COSTS OF BUSINESS, CAUSING A DECREASE IN THE SRAS CURVE. CHAPTER 20 SLIDE 26 CHAPTER 20 SLIDE 27 ERIC CHIANG AS INDUSTRIES BECOME MORE CONCENTRATED (FIRMS HAVE MORE MARKET POWER), SRAS DECREASES. MARIO TAMA/GETTY IMAGES HIGHER INFLATION EXPECTATIONS BY BUSINESSES, WORKERS, OR CONSUMERS WILL DECREASE SRAS. CHAPTER 20 SLIDE 28 SUMMARY OF SHORT-RUN AGGREGATE SUPPLY CHAPTER 20 SLIDE 29 MACROECONOMIC EQUILIBRIUM AGGREGATE PRICE LEVEL (P) LRAS Pe SRAS e AD 0 Short-run macroeconomic equilibrium occurs where AD and SRAS intersect. Long-run macroeconomic equilibrium occurs where AD and LRAS intersect. Qf AGGREGATE OUTPUT (Q) CHAPTER 20 SLIDE 30 THE SPENDING MULTIPLIER  The multiplier magnifies new spending into higher income and output: Each round of spending becomes income to someone else. MULTIPLIER = 1 / (1 − MPC) EXAMPLE: MPC = 0.6 Multiplier = 1 / (1 − 0.6) = 2.5 A $100 increase in new spending generates $250 in aggregate output. CHAPTER 20 SLIDE 31 THE MULTIPLIER AND AD/AS AGGREGATE PRICE LEVEL (P) LRAS P1 P0 SRAS a e AD1 When short run equilibrium is below full employment… …the spending multiplier magnifies new spending, shifting AD toward long-run equilibrium. AD0 0 Q0 Qf AGGREGATE OUTPUT (Q) CHAPTER 20 SLIDE 32 THE GREAT DEPRESSION, 1929–1933  During the Great Depression, shortrun equilibrium output was far below full employment.  Real GDP fell by nearly 40%.  Unemployment reached 25%.  AD shifted far to the left.  It took a sharp rise in government spending on World War II to shift AD back to long-run equilibrium. CHAPTER 20 SLIDE 33 THE GREAT DEPRESSION, 1929–1933 CHAPTER 20 SLIDE 34 DEMAND-PULL INFLATION SRAS1 AGGREGATE PRICE LEVEL (P) LRAS SRAS0 P2 a P1 e P0 AD1 AD0 0 Qf A positive demand shock expands the economy beyond full employment output. Rising input prices eventually push SRAS to the left, back to long-run equilibrium but at a higher price level. Q1 AGGREGATE OUTPUT (Q) CHAPTER 20 SLIDE 35 DEMAND-PULL INFLATION UNITED STATES IN THE 1960s The Vietnam conflict expanded aggregate demand and induced inflation as the economy approached full employment in 1969. JAPAN FROM 1985 TO 1995 Japan enjoyed a huge trade surplus, which expanded the economy. Interest rates were kept low, which fueled a real estate and stock bubble, escalating the inflation rate. CHAPTER 20 SLIDE 36 DEMAND-PULL INFLATION: U.S. AND JAPAN Sharp increases in aggregate demand led to demandpull inflation in the 1960s in the United States and between 1985 and 1995 in Japan. CHAPTER 20 SLIDE 37 COST-PUSH INFLATION SRAS1 AGGREGATE PRICE LEVEL (P) LRAS SRAS0 P2 P1 b e P0 AD1 AD0 0 Q1 Qf A negative supply shock reduces output and raises prices. Increasing AD will push output back to full employment but at even higher prices. Alternatively, decreasing AD will reduce inflation but increase unemployment. AGGREGATE OUTPUT (Q) CHAPTER 20 SLIDE 38 BILL PIERCE/TIME & LIFE PICTURES/GETTY IMAGES THE 1973–1975 OIL SHOCK CAUSED LONG LINES, HIGHER PRICES, AND A SHIFT OF THE SRAS CURVE TO THE LEFT. CHAPTER 20 SLIDE 39 COST-PUSH INFLATION IN THE 1970s CHAPTER 20 SLIDE 40 • • • • • KEY CONCEPTS • • • • • • Aggregate demand Wealth effect Aggregate supply Long-run aggregate supply (LRAS) curve Short-run aggregate supply (SRAS) curve Macroeconomic equilibrium Multiplier Marginal propensity to consume Marginal propensity to save Demand-pull inflation Cost-push inflation CHAPTER 20 SLIDE 41 WHICH OF THE FOLLOWING DOES NOT OCCUR WHEN AGGREGATE PRICE FALLS? A INTEREST RATES FALL. B PURCHASING POWER RISES. C VALUE OF MONEY ASSETS FALLS. D EXPORTS RISE. E AGGREGATE OUTPUT INCREASES. CHAPTER 20 SLIDE 42 GUNOLD BRUNBAUER/DREAMSTIME.COM PRACTICE QUESTION HOW MIGHT A LOCAL CRAFT MARKET GENERATE A LARGER EFFECT ON OUTPUT IN THE CITY THAN A LARGE RETAILER? CHAPTER 20 SLIDE 43 WHICH OF THE FOLLOWING WOULD SHIFT THE SHORT-RUN AGGREGATE SUPPLY CURVE TO THE RIGHT? A A SPIKE IN INPUT PRICES B AN INCREASE IN TAXES C HIGHER INTEREST RATES D A RISE IN PRODUCTIVITY E INCREASED REGULATION CHAPTER 20 SLIDE 44 CHAPTER 20 SLIDE 45 ERIC CHIANG PRACTICE QUESTION ABUNDANT SNOWFALL AND RISING INCOMES HAVE LED TO RECORD SKI INDUSTRY INCOME. HOW DOES THIS AFFECT THE MACROECONOMY? IF AN ECONOMY IS OPERATING ABOVE FULL EMPLOYMENT, WHAT IS LIKELY TO HAPPEN IN THE LONG RUN? A INPUT PRICES AND WAGES RISE; SRAS SHIFTS TO THE LEFT. B INPUT PRICES AND WAGES RISE; SRAS SHIFTS TO THE RIGHT. C INPUT PRICES AND WAGES FALL; SRAS SHIFTS TO THE LEFT. D INPUT PRICES AND WAGES FALL; SRAS SHIFTS TO THE RIGHT. CHAPTER 20 SLIDE 46 END OF CHAPTER SLIDES CREATED BY ERIC CHIANG 20 Tshooter/Shutterstock; Anton Balazh/Shutterstock CHAPTER 20 SLIDE 47
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Explanation & Answer

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SECTION ONE:
A) Since mps = 0.2, for DI  t   0 , we have C  t   2 and S  t   0 . For DI  t   0 ,

C  t   0.8DI  t   0.4 and S  t   0.2DI  t   0.4 . Using that, the table is completed as
below:
DI(t)
0
2
4
6
8
10
12
14

C(t)
0.4
2
3.6
5.2
6.8
8.4
10.0
11.6

S(t)
-0.4
0
0.4
1.8
1.2
1.6
2.0
2.4

B) The dollar value of autonomous consumption is defined as the amount of money whenever
we have zero income level. Therefore, the autonomous consumption’s dollar value is equal to
0.4, as it is not dependent on the income.
It can be calculated from the fact that C  2 when DI  2 , out of which MPC  1  0.2  0.8
of DI which is 0.8  2  1.6 . Therefore, we have the autonomous consumption of 2 1.6  0.4 .
C) The mpc value re...


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