Topic 3.1 - Aggregate Demand (AD) 13. Canadians buy more Arnericanmade cars 14. Lower interest rates affect investment L L Part 3 - Making Connections- Read the quote regarding the Great Recession and answer the questions. 'i.. these events have. . . destroyed jobs. hamstrung economic growth and led to sham declines in the values of many homes and businesses. The best and most comprehensive solution is to nd ways to a stronger economy...onty a strong economy Wm allow people who need jobs to find them.\" Ben Bemanke. Chairman of the Federal Reserve {2012) 15. What most likely happened to aggregate demand in the US to cause the Great Recession? Use specic words or phrases from the quote above to support your answer. 16. The Federal Reserve has the powerto manipulate interest rates. Do you think that Ben Bemanke recommended higher interest rates or lower interest rates to create a \"stronger economy\"? Explain your reasoning. Part 4 - Stretch Your 1hinking Answer the folioMng questrbn. 1?. The wealth effect, interestrate effect, and exchangerate effect all help explain why the aggregate demand curve is downward sloping. Phyllis, a fellow student in your AP Macro class, suggests that the substitution effect that you learned about in Unit '1 also explains why aggregate demand curve is downward sloping. She reasons that since it explains why a market demar'd curve is downward sloping, it must also be valid for aggregate demand. Explain why Phyllis is wrong. Part 3 - Making Connections- Use the information from the March 2019 Forbes article to answer the questions. "African economies are primed to be ranked among the fastest growing in the world in 2019. According to the International Monetary Fund (IMF), projections for the region's economic growth next year has been bumped up to 3.5% - 4% from earlier projections of 3% growth. If you set aside Angola, Nigeria, and South Africa, the region's projected growth rate jumps to 5.7%. Among those nations primed for growth is Zambia, which thanks to the steady rebound of commodity prices, an improvement in the global economy and improved capital market access, enjoyed 5% growth in the third quarter of 2018, up a half-point from a year earlier... The highest inflation rate of 2018 was recorded at 8.3% in October..." 8. According to this article excerpt, is the Zambian economy most likely experiencing a positive output gap or a negative output gap? Use evidence from the excerpt to support your conclusion. 9. What will happen to nominal wages in Zambia in the short run? Explain. 10. What will happen to nominal wages in Zambia in the long-run? Explain. 11. What will happen to real wages if nominal wages increase 12% and inflation continues to be at 8%? Explain. 12. Draw a correctly labeled AS/AD model with AD, SRAS, and LRAS curves representing the Zambia economy with the output gap you identified in question #8. Label the price level, PL,, and output level, Y, and full employment output, YF. 13. Assume that wages and resource prices adjust in the long-run. Draw the change that occurs on the graph and label the price level, PL, and output level, Yz. 14. Assume instead that Zambia experiences a significant increase in investment and capital stock. How would this affect the LRAS? Explain.Topic 3.2 - Multipliers Part 3: More Practice- Assume that in the year 2025 the US economy is in a recession that would require a $1 Trillion increase in total spending to get back to full employment output. Answer the following questions assuming that the marginal propensity to consume is 0.8. 11. Identify the least amount the government could spend to get the economy back to full employment. Show your work. 12. Identify the dollar amount of a tax cut to bring the economy back to full employment. Show your work. Part 4: Article Analysis- In November 2018, GM announced that it would be shutting down four additional manufacturing plants. Read the article excerpt below and answer the following questions. "The workweek after Thanksgiving opened with a shudder as General Motors announced that it would stop production at four U.S. plants and one in Canada, dooming more than 14,000 jobs... The domino effects extend outside the auto industry and, if towns aren't swift or lucky at rescuing themselves, can spiral a local economy down. "Businesses across the community suffer - not just suppliers or service providers who directly supported a closed plant, but also restaurants and bars and retailers of all kinds," John Russo and Sherry Linkon, leaders in working-class studies who used to teach at Youngstown State University, wrote in CityLab... Janesville, which has been spared the worst, lost day-care centers because out-of-work parents no longer needed someone else to keep their kids. Bowling alleys suffered because people without incomes dropped out of leagues." 13. Give your own example of a business (or industry) that would likely be affected by the closure of the GM plants. Explain your reasoning. 14. Imagine that you work in a town with a car manufacturing plant that closed. How do you think this will likely affect your individual MPC and MPS? Explain your reasoning. 15. At the same time that car plants closed, other parts of the country experienced different economic conditions. Utah, for example, saw a tech boom that drove up wages and reduced unemployment. Explain how this exemplifies the difficulty in attempting to calculate an MPC for the entire nation. Part 5: Stretch Your Thinking- Answer the question. 16. Suppose that Bob earns $20,000 a year and that Jimena earns $200,000 a year and that both earned a 10% increase in their disposable income. Who do you think is likely to have the higher MPC? Explain your reasoning.Macro Unit 3 Problem Set Topic 3.2 - Multipliers Part 1: Multiplier Practice- Fill in the chart with the marginal propensity to consume (MPC), marginal propensity to save (MPS), simple spending multiplier, and the maximum change in spending that occurs as a result of each of the following changes in consumption. Change in MPC MPS Multiplier Total Consumption Change in (in billions) Spending (in billions) 1 +$100 +$400 2 +$500 0.8 $200 0.1 4 2 +$2,000 Part 2: Making Connections- In 2009, the US Federal government cut taxes by approximately $300 billion, increased government spending by approximately $300 billion, and increased transfer payments by approximately $200 billion. Answer the following questions assuming that the marginal propensity to consume was 0.75. 5. What was the maximum change in GDP from the government spending? Show your work. 6. What was the maximum change in GDP from the tax cut? Show your work. 7. What was the maximum change in GDP from the government transfers? Show your work. 8. If these numbers were accurate, what was the maximum change in GDP from the entire stimulus package? Show your work. 9. Assume instead that American consumers, fearing an economic collapse, increased their marginal propensity to save to 0.5. Would this increase, decrease, or not change the effectiveness of the stimulus package? Explain. 10. Assume the marginal propensity to save was 0.5 instead of 0.75. Calculate the maximum change in GDP from the entire stimulus package? Show your work.Macro Unit 3 Problem Set Topic 3.3 - Short-Run Aggregate Supply (SRAS) Part 1 - Check Your Understanding- Answer the questions assuming an upward sloping SRAS. 1. Explain why an increase in price level results in an increase in the quantity supplied of goods and services in the short-run. 2. If the size of the labor force is constant, what will likely happen to unemployment as price level increases in the short-run? Explain. 3. Explain why wages are more rigid (or sticky) when price level falls rather than when price level increases. Part 2 - Practice- For each of the following situations, identify the determinant (shifter) and indicate if the short run aggregate supply (SRAS) would most likely increase, decrease, or not change Situation Determinant of SRAS Change in SRAS 4. Raw material and resource prices increase significantly in the US. 5. Computer technology brings new efficiency to industries 6. There is a significant increase in nsumer sp 7. Labor productivity increases dramatically due to new training programs. 8. The government raises corporate taxes significantly. 9. An increase in expected inflation causes workers to demand higher wages. 10. The government gives tax credits to businesses 11. There is a significant decrease in the price of electricity. 12. Due to a trade dispute, oil prices more than double. 13. Businesses begin tracking inventories electronically, increasing efficiency. 14. A significant increase in government transfer payments to individualsTopic 3.3 - Short-Run Aggregate Supply (SRAS) Part 3 - Draw It- Draw a correctly labeled short-run aggregate supply curve and show what would happen as a result of each scenario. 15. Business and corporate taxes decrease 16. Productivity decreases 17. Businesses and workers expect significantly 18. Consumer spending increases higher inflation in the near future Part 4 - Stretch Your Thinking- Consider the quote and answer the question. "CARACAS, Venezuela-Giuseppe Cordivani's factory on the outskirts of the capital used to make nearly 300 pairs of women's shoes a day, from pumps to high-heeled dancing shoes that sold nationwide. With hyperinflation biting, he's making just 20 today." The Wall Street Journal, March 2019 19. According to the SRAS curve model, a higher price level should cause output to increase. Why might hyperinflation in Venezuela actually decrease output? Explain your reasoning.Topic 3.4 - Long-Run Aggregate Supply (LRAS) Part 1 - Check Your Understanding- Answering the following questions. 1. What happens to the LRAS curve when there is an increase in price level? Explain. 2. What does the LRAS curve imply about the long-run trade-off between inflation and unemployment? Explain. 3. Identify three different reasons the LRAS curve would shift to the right. 4. A change in which component of GDP (consumption, investment, government spending, and net exports), would most likely result in the most economic growth? Explain your reasoning. Part 2 - Put It Together- Use the production possibilities curve (PPC) to answer the questions. 5. Explain why the PPC and LRAS both represent maximum sustainable capacity. Capital Goods 80 60 6. Is combination A on this graph likely on this economy's LRAS curve? Explain. 20 7. Assume that a change in productivity allows 100 200 300 Consumer Goo this economy to sustainably produce 80 capital goods and 300 consumer goods. How can this change be shown using a LRAS curve? Part 3 - Stretch Your Thinking- Read the quote below and answer the question. "Policies to strengthen education and training, to encourage entrepreneurship and innovation, and to promote capital investment, both public and private, could all potentially be of great benefit in improving future living standards in our nation." -Janet Yellen, Chairman of the Federal Reserve 8. Pick one of the three policies mentioned in the quote above. Identify what that policy would most likely do to the LRAS curve and explain why that policy improves living standards.Topic 3.5 - Equilibrium in the AD-AS Model Part 1- Check Your Understanding- Use the info in the graph to answer the following questions. m at and on w m :: 1M ti m "not {hm-'0 from Protein: Mad 3 3 5| u- .1\" man no: no: me tau turn our: am we: 1. Did the US economy face a recessionary gap or inationary gap in 2D'1? Explain your answer. 2. Predict what happened to the unemployment rate from 2003-2005. Explain your answer. 3. If 2.5% GDP growth results in full employment. what would likely happen in the longrun if GDP growth reached 15% in the short an? Explain. 4. Draw a coneclty labeled ASIAD model with AD, 5. Draw a coneclty labeled ASIAD model with AD, ERAS, and LRAS curves representing the U5. ERAS, and LRAS curves representing the US. economy in 199921200. Indicate the price level, economy in EDGE21309. Indicate the price level, PL,, and output level, '1'] and full employment PL,, and output level, Y1 and full employment GUtPUL YF- DUtPUL YF- Topic 3.6 - Changes in the AD-AS Model Part 1 - Draw It- For each of the following scenarios show the short-run effect on aggregate demand, short-run aggregate supply, and long-run aggregate supply. Label the initial price level PL, and the new price level and output, PLz and Y2. Start each graph at full-employment, labeled YF. 1. In the mid-1990s, Silicon Valley 2. In 2005, Hurricane Katrina destroyed oil and improved microprocessors, leading to natural gas refining capacity in the Gulf of Mexico technological advancements in production 3. In 1999, businesses purchased upgraded 4. In 2008, the global financial crisis decreased machines and computers to prepare for Y2k consumer and investment spending 5. In 2001, the dot-com bubble burst, lowering 6. In 2016, consumer confidence began rising and the stock market and decreasing consumer the housing market stabilized confidencePart 2 - Draw It Again- For each of the following scenarios show the effect on AD, SRAS, and LRAS. Label the initial price level PL, and the new price level and output, PL, and Y2. Start each graph in either a positive or a negative output gap, depending on the scenario. 7. To combat a recession, Congress 8. In 2018 with unemployment at 4.1%, the Tax passed the Economic Stimulus Act of Cuts and Jobs Act of 2017 went into effect 2008 9. Still feeling the effects of the Great 10. To fight stagflation in the 1979, Paul Depression, the US increased military Volcker, the Chairman of the Federal Reserve, spending and entered World War 2 in 1941 increased interest rates to lower consumption Part 3 - Stretch Your Thinking- Answer the question. 11. Inflation can be caused by changes in aggregate demand (demand-pull) or changes in aggregate supply (cost-push). In your opinion, which of these two are worse for the overall economy? Explain your reasoning.Macro Unit 3 Problem Set Topic 3.1 - Aggregate Demand (AD) Part 1 - Practice- For each of the following situations, identify the determinant (shifter) and indicate if the aggregate demand (AD) would most likely increase, decrease, or not change Situation Determinant of AD Change in AD 1. Congress cuts personal income taxes by $20 million. 2. Interest rates increase causing a decrease in capital stock. 3. Consumer confidence declines and people fear a recession. 4. Stock market collapses causing the loss of millions of dollars of assets. 5. The price level increases by 5%. 6. Defense spending is increased due to military conflicts abroad. 7. The government raises taxes and cuts spending in an attempt to balance its budget. 8. Future business expectations are predicting growth for most US industries. 9. Interest rates decrease from 5% to 2%. 10. Incomes increase for US trading partners Canada and China. Part 2 - Draw It- Draw the effect on aggregate demand for the US as a result of the following scenarios. Label the axes and the aggregate demand curve and show the change using an arrow. 11. Government spending decreases 12. The stock market skyrocketsTopic 3.7 - Long-Run Self Adjustment Part 1 - Graph It- Draw a correctly labeled graph of aggregate demand, aggregate supply, and long-run aggregate supply. Start each graph at full-employment. Show what happens in both the short-run and the long-run if the economy is given time to self-adjust. 1. Consumer spending increases as 2. Congress passes a bill dramatically reducing consumers confidence increases government spending 3. Explain how the flexibility of wages and resources prices affects the duration of recessionary gaps and inflationary gaps. 4. The graphs above show that the economy can self-adjust. Explain why politicians and government officials often don't wait for these adjustments to occur when there is a recession. Part 2 - Stretch Your Thinking- Read the quote and answer the questions. "The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again." -John Maynard Keynes 5. Based on this quote, why doesn't Keynes advocate waiting for the economy to self-adjust in the long run? 6. Instead of waiting for the economy to self-adjust, what policies might Keynes support to address a recessionary gap? Explain. 7. What policies might Keynes support to address an inflationary gap? Explain