Question 3

3. Why the aggregate demand curve slopes downward The graph below shows the aggregate demand (AD) curve for a hypothetical economy. At point X, the quantity of output demanded is $500 billion, and the price level is 120. Moving up along the AD curve from point X to point Y, the quantity of output demanded falls to $300 billion, and the price level rises to 140. (?) 170 180 150 140 PRICE LEVEL 130 120 110 AD 100 90 100 200 300 4 500 600 700 200 OUTPUT (Billions of dollars) As the price level rises, the cost of borrowing money will , causing the quantity of output demanded to . This phenomenon is known as the effect. Additionally, as the price level rises, the impact on the domestic interest rate will cause the real value of the dollar to * in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore , and the number of foreign products purchased by domestic consumers and firms (imports) will . Net exports will therefore causing the quantity of domestic output demanded to . This phenomenon is known as the effect.4. Determinants of aggregate demand The graph below is associated with a hypothetical country. Consider an increases in aggregate demand (AD). Specifically, aggregate demand shifts to the right from A to A, causing the quantity of output demanded to rise at each price level. For instance, at a price level of 140, output is now 400 billion, where initially it was 300 billion. 170 5 180 150 + 140 f - - + -+ o > 1 1 5 a0 Pl o = 1 1 o o120 + 1 1 AD, 1 1 n T : : AD, 1 1 100 1 1 1 1 0w br . . . o 100 200 300 400 500 600 700 B0 QUTPUT (Bilkons of dollars) The following table lists several determinants of aggregate demand. Fill in the missing values in the table by selscting the change in each scenario required to increase aggregate demand. Change Required to Increase AD Interest rates - Domestic currency value relative to the foreign currency o Consumer expectations about future profitability b Government spending - 5. The slope and position of the long-run aggregate supply curve Assume the Federal Reserve triples the growth rate of the quantity of money in circulation. In the long run, this increase in money growth will affect which of the following? Check all that apply. [) The price level The size of the labor force [_] The level of technological knowledge [ The inflation rate Suppose when unemployment is at its natural rate the economy produces a level of real GDP equal to $60 billion. Using the purple points (diamond symbol) piot the economy''s long-run aggregate supply (LRAS) curve on the graph. @ 132 128 LRAS 124 120 118 PRICE LEVEL 112 108 104 100 0 10 20 30 40 S50 B8O TO 8 90 100 QUTPUT (Billions of dollars) Suppose now the government passes a law that significantly increases the minimum wage. This change in policy will cause the natural rate of unemployment to "%, which will: () Mot impact the long-run aggregate supply curve ) shift the long-run aggregate supply curve to the left ) shift the long-run aggregate supply curve to the right Complete the following table by determining how each event impacts the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift A government-sponsored training program increases the skill level of the workforce. - The government allows more immigration of working-age adults who find work. v A scientific breakthrough significantly increases food production per acre of farmland. bl bt B ek m e