Page 260 - Krugmans Economics for AP Text Book_Neat

12. Using aggregate demand, short -run aggregate supply, and Use another diagram to show the effect of policies chosen
long -run aggregate supply curves, explain the process by which to address the change in the aggregate price level.
each of the following government policies will move the econ- c. Why do supply shocks present a dilemma for government
omy from one long -run macroeconomic equilibrium to an- policy makers?
other. Illustrate with diagrams. In each case, what are the
short -run and long -run effects on the aggregate price level and 15. The late 1990s in the United States were characterized by sub-
aggregate output? stantial economic growth with low inflation; that is, real GDP
increased with little, if any, increase in the aggregate price level.
a. There is an increase in taxes on households.
Explain this experience using aggregate demand and aggregate
b.There is an increase in the quantity of money. supply curves. Illustrate with a diagram.
c. There is an increase in government spending.
16. In each of the following cases, either a recessionary or infla-
13. The economy is in short -run macroeconomic equilibrium at tionary gap exists. Assume that the aggregate supply curve is
point E 1 in the accompanying diagram. Based on the diagram, horizontal, so that the change in real GDP arising from a shift
answer the following questions. of the aggregate demand curve equals the size of the shift of
the curve. Calculate both the change in government purchases
LRAS of goods and services, and, alternatively, the change in govern-
Aggregate
price ment transfers necessary to close the gap.
level SRAS 1
a. Real GDP equals $100 billion, potential output equals
$160 billion, and the marginal propensity to consume is 0.75.
b.Real GDP equals $250 billion, potential output equals
E 1
P 1 $200 billion, and the marginal propensity to consume is 0.5.
c. Real GDP equals $180 billion, potential output equals
$100 billion, and the marginal propensity to consume is 0.8.
AD 1 17. Most macroeconomists believe it is a good thing that
Y 1 Y P Real GDP taxes act as automatic stabilizers and lower the size of the
multiplier. However, a smaller multiplier means that the
a. Is the economy facing an inflationary or a recessionary gap? change in government purchases of goods and services, gov-
b.What policies can the government implement that might ernment transfers, or taxes necessary to close an inflationary
bring the economy back to long -run macroeconomic equi- or recessionary gap is larger. How can you explain this ap-
librium? Illustrate with a diagram. parent inconsistency?
c. If the government did not intervene to close this gap, would 18. The accompanying table shows how consumers’ marginal
the economy return to long -run macroeconomic equilib- propensities to consume in a particular economy are related to
rium? Explain and illustrate with a diagram. their level of income.
d.What are the advantages and disadvantages of the govern-
ment implementing policies to close the gap? Income range Marginal propensity to consume
14. In the accompanying diagram, the economy is in long -run $0 − $20,000 0.9
macroeconomic equilibrium at point E 1 when an oil shock
shifts the short -run aggregate supply curve to SRAS 2 . Based on $20,001 − $40,000 0.8
the diagram, answer the following questions. $40,001 − $60,000 0.7
$60,001 − $80,000 0.6
Aggregate LRAS Above $80,000 0.5
price
level SRAS 2
SRAS 1 a. Suppose the government engages in increased purchases of
goods and services. For each of the income groups in the ac-
companying table, what is the value of the multiplier—that
is, what is the “bang for the buck” from each dollar the gov-
E 1
ernment spends on government purchases of goods and
P 1
services in each income group?
AD 1
b.If the government needed to close a recessionary or infla-
Y 1 Real GDP tionary gap, at which group should it primarily aim its fis-
cal policy of changes in government purchases of goods
a. How do the aggregate price level and aggregate output and services?
change in the short run as a result of the oil shock? What is
19. From 2003 to 2008, Eastlandia experienced large fluctuations
this phenomenon known as?
in both aggregate consumer spending and disposable income,
b.What fiscal policies can the government use to address the
but wealth, the interest rate, and expected future disposable in-
effects of the supply shock? Use a diagram that shows the
come did not change. The accompanying table shows the level
effect of policies chosen to address the change in real GDP.
of aggregate consumer spending and disposable income in
218 section 4 National Income and Price Determination