RED RIVER COLLEGE

Economics 1011

Assignment 7

Open Questions

1. During the Great Depression in Canada, the price level fell, real GDP fell and unemployment reached almost 20%. Investment fell and consumption fell. Show the effect of these changes from a vibrant 1929 economy to a battered 1933 economy using the AD/AS model.

2. Suppose there are two countries A and B that in 1876 had the same RGDP per capita of 1 thousand dollars in a year. Suppose that RGDP of economy A grew from 1876 to 2020 (144 year period) at an average growth rate of 2% per year while country B grew in the same period at an average growth rate of 3% per year.

a. How long did it take economy A and B to double their initial level of RGDP per capita? What year did A and B achieve this? (Hint: use the 72 rule)

b. What is the RGDP per capita of economy A and B by the year 2020? How large is the RGDP per capita of economy B in comparison to economy A?

True/False questions

3. Determine if the following statements are true or false.

__Starting in a long run macroeconomic equilibrium a business cycle occurs due to an aggregate demand shock while nothing else changes in the AD-AS model.

__ Starting in a long run macroeconomic equilibrium a real negative supply shock that affects the AS and the potential output level of the economy creates a business cycle if nothing else changes in the AD-AS model.

__Stagflation occurs if the AS in the short run and potential output suffer a negative shock while nothing else changes in the AD-AS model.

__Covid19 can be understood in the AD-AS model as a stagflation situation.

4. Determine for each statement if it's true or false in regards to long run equilibrium.

__an increase in the inflation rate affects negatively the RGDP in the long run.

__an increase in consumption levels generate a rightward shift of the AS curve in the short run.

__an increase in the investment levels generate a rightward shift of the AD curve.

__starting in a long run macroeconomic equilibrium and keeping constant the AS and potential output curves one can say that a negative AD shock coupled with flexible wages (no sticky wages) generates a recessionary gap.

__a war that destroys human life and capital stock would generate a real shock to an economy which affects negatively the AS curve in the short run as well as the potential output level of the economy.

__a technological innovation would generate a real shock to an economy that would affect positively the AS curve as well as the potential output level of the economy.

5. The US economy is approximately 6 times the size of the Chinese economy in 2020 in terms of RGDP per capita since RGDP pc of the US is $60,000 while that of China is $10,000. Suppose China grows at 4% per year and the US grows at 1% per year. What would be the RGDP per capita of the US and China in the year 2092? Would China have a higher RGDP pc? Justify your answer using the 72 rule.