Macroeconomics (7th Edition)
7th Edition
ISBN: 9780134738314
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 13, Problem 13.4.8PA
To determine
The recession impact on the inflation rate.
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E.
2.
4)During a 2008 interview, then German Finance Minister
Peer Steinbrueck said, "We have to watch out that in
Europe and beyond, nothing like a combination of
downward economic [growth] and high inflation rates
emerges-something that experts call stagflation."
Such a situation can be depicted by the movement of
the short-run aggregate supply curve from its original
position, SRAS,, to its new position, SRAS2, with the
new equilibrium point E2 in the accompanying figure.
In this question, we try to understand why stagflation
is particularly hard to fix using fiscal policy.
Aggregate
price
level
LRAS
SRAS2
SRAS,
AD1
Real GDP
Recessionary gap
a. What would be the appropriate fiscal policy response
to this situation if the primary concern of the govern-
ment was to maintain economic growth? Illustrate
the effect of the policy on the equilibrium point and
the aggregate price level using the diagram.
b. What would be the appropriate fiscal policy response
to this situation if the…
Rapid advances in technology greatly reduce production costs. Using the same amount of resources, firms can produce more output using new technologies. With the help of the aggregate demand – aggregate supply diagrams, briefly explain how technological advances may affect the equilibrium inflation rate and output in an economy in the short-run and in the long run.
Price level (GDP deflator, 2009 = 100)
The graph shows an economy's aggregate demand curve, short-run aggregate
supply curve, long-run aggregate supply curve, and equilibrium.
Draw the AD curve when it is correctly expected that the inflation rate will be 20
percent a year. Label it.
Draw the SAS curve when a change to the money wage rate occurs that correctly
anticipates the increase in aggregate demand. Label it.
Draw a point at the new equilibrium.
As we move up along the LAS curve, the
A. real wage rate is constant
B. real wage rate is increasing
C. real wage rate is decreasing
D. money wage rate is constant
130-
120-
110-
100
100-
90-
LAS
13.0
SAS
0
AD
80-
11.5
12.0 12.5 13.0 13.5 14.0 14.5 15.0
Real GDP (trillions of 2009 dollars)
>>> Draw only the objects specified in the question.
Chapter 13 Solutions
Macroeconomics (7th Edition)
Ch. 13 - Prob. 13.1.1RQCh. 13 - Prob. 13.1.2RQCh. 13 - Prob. 13.1.3RQCh. 13 - Prob. 13.1.4PACh. 13 - Prob. 13.1.5PACh. 13 - Prob. 13.1.6PACh. 13 - Prob. 13.1.7PACh. 13 - Prob. 13.1.8PACh. 13 - Prob. 13.1.9PACh. 13 - Prob. 13.1.10PA
Ch. 13 - Prob. 13.2.1RQCh. 13 - Prob. 13.2.2RQCh. 13 - Prob. 13.2.4RQCh. 13 - Prob. 13.2.5RQCh. 13 - Prob. 13.2.6PACh. 13 - Prob. 13.2.7PACh. 13 - Prob. 13.2.8PACh. 13 - Prob. 13.2.9PACh. 13 - An article in the Economist noted that the...Ch. 13 - Prob. 13.2.11PACh. 13 - Prob. 13.2.12PACh. 13 - Prob. 13.2.13PACh. 13 - Prob. 13.2.14PACh. 13 - Prob. 13.2.15PACh. 13 - Prob. 13.3.1RQCh. 13 - Prob. 13.3.2RQCh. 13 - Prob. 13.3.3RQCh. 13 - Prob. 13.3.4PACh. 13 - Prob. 13.3.5PACh. 13 - Prob. 13.3.6PACh. 13 - Prob. 13.3.7PACh. 13 - Prob. 13.3.8PACh. 13 - Prob. 13.3.9PACh. 13 - Prob. 13.3.10PACh. 13 - Prob. 13.4.1RQCh. 13 - Prob. 13.4.2RQCh. 13 - Prob. 13.4.3RQCh. 13 - Prob. 13.4.4PACh. 13 - Prob. 13.4.5PACh. 13 - Prob. 13.4.6PACh. 13 - Prob. 13.4.7PACh. 13 - Prob. 13.4.8PACh. 13 - Prob. 13.4.9PACh. 13 - Prob. 13.4.10PACh. 13 - Prob. 13.2RDECh. 13 - Prob. 13.1CTECh. 13 - Prob. 13.2CTE
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- One reason the aggregate demand curve is downward sloping is that a lower price levelarrow_forwardThe country of Merryville has an unemployment rate that is greater than the natural rate of unemployment. Using a correctly labeled graph of aggregate demand and aggregate supply, show the current equilibrium real gross domestic product, labeled YC, and price level in Merryville, labeled PLC. The president of Merryville is receiving advice from an economic adviser who advises the president to decrease personal income taxes. How would such a decrease in taxes affect aggregate demand? Explain. The government of Merryville increases spending on goods and services by $200 billion, which is financed by borrowing. If the marginal propensity to consume in Merryville is 0.75: Calculate the multiplier What is the maximum possible change in real gross domestic product (GDP) that could result from the $200 billion increase in government spending?arrow_forwardDuring a 2008 interview, then German Finance Minister Peer Steinbrueck said, "We have to watch out that in Europe and beyond, nothing like a combination of downward economic [growth] and high inflation rates emerges-something that experts call stagflation." Such a situation can be depicted by the movement of the short-run aggregate supply curve from its original position, SRAS,, to its new position, SRAS2, with the new equilibrium point E2 in the accompanying figure. In this question, we try to understand why stagflation is particularly hard to fix using fiscal policy.arrow_forward
- Suppose that the inflation rate remains constant while output increases and the unemployment rate decreases. Using an aggregate demand and supply graph, show how this scenario is possible.arrow_forwardIn the short run, the quantity of output supplied by firms can deviate from the natural level of output if the actual price level deviates from the expected price level in the economy. A number of theories explain reasons why this might happen. For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 110. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will and firms that rely on catalogs will respond by the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected increase in the price level causes the quantity of output…arrow_forwardThe CPI in Mexico has been increasing consistently recently. A change in expectations that reflects this trend results in a movement along(a movement along, an upward shift in , a downward shift in, no change)the short-run aggregate supply curve, (a movement along, an upward shift in , a downward shift in, no change) in the long-run aggregate supply curve, (a movement along, an upward shift in , a downward shift in, no change) in the aggregate demand curve, (a movement along, an upward shift in , a downward shift in, no change) in the short-run Phillips curve, and (a movement along, an upward shift in , a downward shift in, no change) in the long-run Phillips curve.arrow_forward
- 6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output supplied by firms can deviate from the natural level of output if the actual price level deviates from the expected price level in the economy. A number of theories explain reasons why this might happen. For example, the misperceptions theory asserts that changes in the price level can temporarily mislead firms about what is happening to their output prices. Consider a soybean farmer who expects a price level of 100 in the coming year. If the actual price level turns out to be 90, soybean prices will and if the farmer mistakenly assumes that the price of soybeans declined relative to other prices of goods and services, the quantity of soybeans supplied. If other producers in this economy mistake changes in the price level for changes in their relative prices, the unexpected decrease in the price level causes the quantity of output supplied to level of output in the short run. she…arrow_forwardUse a correctly labeled aggregate demand and aggregate supply graph to illustrate cost-push inflation. Given an example of what might cause cost-push inflation in the economyarrow_forwardUse aggregate demand and aggregate supply to explain the inverse relationship between inflation and unemplymentarrow_forward
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