Question 1

Other things equal, what effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and the level of real output.

a. A reduction in the economy's real interest rate.

b. A major increase in federal spending for health care (with no increase in taxes).

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

d. A 10 percent reduction in personal income tax rates (with no change in government spending).

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

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

g. A sizable depreciation in the international value of the dollar.

Question 2

Other things equal, what effect will each of the following have on the equilibrium price level and level of real output?

a. An increase in aggregate demand in the steep portion of the aggregate supply curve.

b. An increase in aggregate supply, with no change in aggregate demand (assume that prices and wages are flexible upward and downward).

c. Equal increases in aggregate demand and aggregate supply.

d. A reduction in aggregate demand in the relatively flat portion of the aggregate supply curve.

e. An increase in aggregate demand and a decrease in aggregate supply.

Question 3

Assume the following data for a country: total population, 500; population under 16 years of age or institutionalized, 120; not in labor force, 150; unemployed, 23; part-time workers looking for full-time jobs, 10. What is the size ofthe labor force? What is the official unemployment rate?

Question 4

If your nominal income rose by 5.3 percent and the price level rose by 3.8 percent in some year, by what percentage would your real income (approximately) increase? If your nominal income rose by 2.8 percent and your real income rose by 1.1 percent in some year, what must have been the (approximate) rate of inflation?