Page 261 - Krugmans Economics for AP Text Book_Neat

Section 4 Summary

millions of dollars for each of these years. Use this information a. Is Albernia facing a recessionary or inflationary gap?
to answer the following questions. b.Which type of fiscal policy—expansionary or contrac-
tionary—would move the economy of Albernia to potential
Disposable income Consumer spending output, Y P ? What are some examples of such policies?
Year (millions of dollars) (millions of dollars) c. Use a diagram to illustrate the macroeconomic situation
2003 $100 $180 in Albernia after the successful fiscal policy has been
implemented.
2004 350 380
24. The accompanying diagram shows the current macroeco-
2005 300 340
nomic situation for the economy of Brittania; real GDP is Y 1 ,
2006 400 420 and the aggregate price level is P 1 . You have been hired as an
2007 375 400 economic consultant to help the economy move to potential
2008 500 500 output, Y P .
Aggregate
price LRAS
a. Plot the aggregate consumption function for Eastlandia. SRAS
level
b.What is the marginal propensity to consume? What is the
marginal propensity to save? P 1 E 1
c. What is the aggregate consumption function?
20. From the end of 1995 to March 2000, the Standard and Poor’s
500 (S&P 500) stock index, a broad measure of stock market
AD 1
prices, rose almost 150%, from 615.93 to a high of 1,527.46.
From that time to September 10, 2001, the index fell 28.5% to
1,092.54. How do you think the movements in the stock index Y Y Real GDP
Potential P 1
influenced both the growth in real GDP in the late 1990s and
output
the concern about maintaining consumer spending after the
terrorist attacks on September 11, 2001?
a. Is Brittania facing a recessionary or inflationary gap?
21. How will investment spending change as the following events b.Which type of fiscal policy—expansionary or contrac-
occur? tionary—would move the economy of Brittania to potential
a. The interest rate falls as a result of Federal Reserve policy. output, Y P ? What are some examples of such policies?
b.The U.S. Environmental Protection Agency decrees that cor- c. Illustrate the macroeconomic situation in Brittania with
porations must upgrade or replace their machinery in order a diagram after the successful fiscal policy has been
to reduce their emissions of sulfur dioxide. implemented.
c. Baby boomers begin to retire in large numbers and reduce 25. An economy is in long -run macroeconomic equilibrium when
their savings, resulting in higher interest rates each of the following aggregate demand shocks occurs. What
kind of gap—inflationary or recessionary—will the economy
22. Explain how each of the following actions will affect the level
face after the shock, and what type of fiscal policies would help
of investment spending and unplanned inventory investment.
move the economy back to potential output? How would your
a. The Federal Reserve raises the interest rate.
recommended fiscal policy shift the aggregate demand curve?
b.There is a rise in the expected growth rate of real GDP.
a. A stock market boom increases the value of stocks held
c. A sizable inflow of foreign funds into the country lowers by households.
the interest rate.
b.Firms come to believe that a recession in the near future
23. The accompanying diagram shows the current macroeco- is likely.
nomic situation for the economy of Albernia. You have been c. Anticipating the possibility of war, the government in-
hired as an economic consultant to help the economy move to creases its purchases of military equipment.
potential output, Y P .
d.The quantity of money in the economy declines and interest
rates increase.
Aggregate
price LRAS SRAS
level

P 1 E 1

AD 1
Y 1 Y P Potential Real GDP
output
Summary 219