1) What effects would each of the following have on aggregate demand or aggregate supply, other things equal? In each case, use a diagram to show the expected effects on the equilibrium price level and the level of real output, assuming that the price level is flexible both upward and downward. (LO3)

a.A widespread fear by consumers of an impending economic depression.

b.A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output.

c.A reduction in interest rates.

d. A major increase in spending for health care by the federal government.

e.The general expectation of coming rapid inflation.

f. The complete disintegration of OPEC, causing oil prices to fall by one-half.

g. A 10 percent across-the-board reduction in personal income tax rates.

h. A sizable increase in labor productivity (with no change in nominal wages).

i. A 12 percent increase in nominal wages (with no change in productivity).

j. An increase in exports that exceeds an increase in imports (not due to tariffs)

3. Suppose that the aggregate demand and aggregate supply schedules for a hypothetical economy are as shown in the following table. (LO3) Amount of Real GDP Demanded, Price Level (Price Amount of Real GDP Supplied, Billions Index) Billions 5100 300 3450 200 250 400 300 200 300 400 150 200 500 100 100 a. Use the preceding data to graph the aggregate demand and aggregate supply curves. What is the equilibrium price level and the equilibrium level of real output in this hypothetical economy? Is the equilibrium real output also necessarily the full-employment real output? b. Ifthe price level in this economy is 150, will quantity demanded equal, exceed, or fall short of quantity supplied? By what amount? If the price level is 250, will quantity demanded equal, exceed, or fall short of guantity supplied? By what amount? c. Suppose that buyers desire to purchase 5200 billion of extra real output at each price level. Sketch in the new aggregate demand curve as AD,. What is the new equilibrium price level and level of real output? FIGURE 13.3 Built-in stability. Tax revenues, T, vary directly with GDP, and government spending G is assumed to be independent of GDP. As GDP falls in a recession, deficits occur automatically and help alleviate the recession. As GDP rises during expansion, surpluses occur automatically and help offset possible inflation. Surplus Gaovernment expenditures, G, and tax revenues, T Deficit 0 GDP, GDP, GDP, Real domestic output, GDP page 316 The built-in stability provided by the U.S. tax system has reduced the severity of business fluctuations, perhaps by as much as 8 to 10 percent of the change in GDP that otherwise would have occurred.! In recession year 2009, for example, revenues from the individual income tax fell by a staggering 22 percent. This decline helped keep household spending and real GDP from falling even more than they did. But built-in stabilizers can only dampen, not counteract, swings in real GDP. Discretionary fiscal policy (changes in tax rates and expenditures) or monetary policy (central bankcaused changes in interest rates) may be needad to counter a recession or an inflation of any appreciable magnitude