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Aggregate Expenditures, Aggregate Supply and Aggregate Demand Questions

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1. 20 points. Use an aggregate demand (AD) and aggregate supply (AS) model (short run model) to analyze this problem. Do not use a different model. Use AD & AS.
NOTE: this may be fastest with a hand-drawn graph. One option is to draw and scan, while another option is to draw, take a photo and insert the photo to your document. Feel free to use other approaches too.

A. Represent an initial equilibrium price and output level with the economy operating at or near full capacity (Hint: think about the shape of the AS curve and what this means for where AD crosses along the AS curve).
Label the following: each axis, the AD curve, the AS curve, the equilibrium output level and the equilibrium price level.

B. Suppose there is a tax cut, holding constant government purchases and all other factors affecting the AD curve. Illustrate the short run effects on output and the price level and LABEL them.

C. Give a 2 -4 sentence explanation and include why the initial state of the economy matters in your explanation.

2. 15 points. Suppose, ceteris paribus, government purchases decreased by $4 billion, investment spending increased by $40 billion.

A. EXPLAIN (no calculation yet). Would total output increase or decrease? What is the multiplier effect and how does it influence the answer to the question.
B. SOLVE. If 70% of a change in income is spent on new goods and services, what is the anticipated change in total output? Use the formula for the multiplier effect to calculate the change in total output.

3. 10 points. Evaluate the following as true or false and explain:
A five percent sales tax on food is an example of a flat tax.

4. 10 points. How does the article "Meltdown Averted, Bernanke Struggled to Stoke Growth- Fed Chairman Fails to Engineer Robust Recovery, Even with Extraordinary Measures"" illustrate the Federal Reserve's dual mandate, monetary policy, and monetary policy tools? Use your notes and book to describe the purpose of the Fed and the article for examples.

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QUESTION 1

Note that the above AD and AS lines were drawn as straight lines rather than the curved lines that AD and AS lines should be. This is because it is difficult to draw curved lines in PowerPoint. You can replace the straight lines by curves lines anytime - I attached the PowerPoint where I drew the graph.

Whenever taxes on consumer income is reduced, in the short run, it is expected that the aggregate demand shifts to the right - consumers tend to spend most of what they saved on the tax cuts. However, the aggregate supply curve doesn't move because the tax cuts doesn't affect the producers. Nevertheless, since the demand cruve shifted to the right, then it is expected that the equilibrium price will also ...

Solution Summary

The solution does the following:

Draw and discuss the impact of tax cuts on aggregate demand and aggregate supply.
How does the multiplier effect impact total output?
Compare and contrast flat tax and sales tax.
Discuss the rule of the Federal Reserve.

$2.19
See Also This Related BrainMass Solution

Macroeconomic Multiple Choice Questions

1) For an economy at full employment, an increase in the quantity of money will lead to which of the following sequence of shifts in aggregate demand and supply curves
A) Decrease aggregate demand, increase short -run aggregate supply constant long-run aggregate supply (B) Decrease aggregate demand, decrease short -run aggregate supply constant long-run aggregate supply (C) Increase aggregate demand, increase short-run aggregate supply, increase long-run aggregate supply(D) Increase aggregate demand, increase short-run aggregate supply, decrease long-run aggregate supply
2) By itself, an increase in the price of oil shift to be
A)short-run aggregate supply curve leftward and does not shift the aggregate curve (B) short-run aggregate supply curve rightward and does not shift the aggregate curve (C) aggregate demand curve leftward and does not shift the short-run aggregate supply curve. (D) ) aggregate demand curve rightward and does not shift the short-run aggregate supply curve

3) The marginal propensity to consume equals 1 minus the
A ) marginal propensity to invest (B) ) marginal propensity to save (C) ) marginal propensity to import (D) marginal propensity to pay taxes

4) Which of the following are included in autonomous expenditure?
A) investment (B) government purchase (C) autonomous consumption expenditure (D) all of the above

5) In a recession,
A) investment is low and the capital stock grows quickly (B) investment is low and the capital stock grows slowly (C)investment is high and consumption is low (D) consumption is high and government spending is low

6) According to the Keynesian theory of business cycle , a(n)
A) decrease in profits expectation will decrease investment only and will not change real GDP or consumption expenditure (B) decrease in profits expectation will decrease investment, real GDP and consumption expenditure (C) increase in profits expectation will increase investment only and will not change real GDP or consumption expenditures (D) decrease in sale expectation will affect the price level and not real GDP

7)If the real interest rate is 4% and workers expect real wages to be 2% year higher next year, according to the real business cycle theory worker will work
A) more this year and less next year (B) less this year and less next year (C) more this year and more this year (D) less this year and more next year

8) All of the following are government expenditure items except
A) interest on government debt (B) transfer payment (C) purchase of corporate bonds (D) purchase of goods and service

9) Suppose the tax rate on interest income is 25%, the real interest rate is 4% , and the inflation rate is 4% . In this case , the real after-tax interest rate is
A) .5% (B) 3.5 % (C) 4.0 % (D) 2.0%

10) With steep short run aggregate supply curve,
A) an increase in government spending will not have an impact on the price level (B) fiscal policy will be an effective tool to reduce unemployment without raising price too much (C) an increase in taxes that does not change potential GDP will not decrease real GDP by much (D) There is a large change in real GDP whenever the price level rises

11) Monetary policy affects macroeconomics performance by
A) changing aggregate supply (B) creating budget surpluses (C) changing aggregate demand (D) creating budget deficits

12) Suppose that the Feds is using this feedback rule: Every time real GDP exceeds potential GDP is less than potential GDP, contractionary policy is used and whenever real GDP is less than potential GDP, expansionary policy is used GDP equals potential GDP and then aggregate demand increase . As a consequence of the policy action taken is the resulting
A) contractionary policy will lower the price level from what it otherwise would be (B) contractionary policy will decrease unemployment from what it otherwise would be (C) expansionary policy will decrease unemployment from what it otherwise would be (D) expansionary policy will lower the price level from what it otherwise would be

13) A foreign student from Hong Kong studying in an American University who has no income from U.S source get a hair cut from a local salon . This hair cut will
A) increase the volume of exports from Hong Kong to the U.S (B) decrease the volume of imports from Hong Kong to the U.S (C) increase the volume of exports from the U.S to Hong Kong. (D) decrease the volume of imports from the U.S to Hong Kong

14) Country A and Country B both consume and produce only food and clothing. Both countries use only labor to produce these two products. A worker in country A can produce 6 units of clothing or 10 units of food each day while worker in country B can produce 4 units of clothing and 8 units of food . Which statement is true .
A) The opportunity cost of clothing production in country A is greater than that of country (B) The opportunity cost of food production in country A is greater than that of country B (C) The opportunity cost of food production in country A is the same as than that of country B (D) The opportunity cost of clothing production in country B is less than that of country A

15) A decrease in a country's tariffs will:
A) not change its imports or exports (B) increase both its imports and exports (C) increase its imports but not its exports(D) increase its exports but not its imports

16) Which of the following is a factor that determine the amount of dollars supplied in the foreign exchange market?
A) The exchange rate (B) U.S interest rate (C) Interest rate in foreign country (D) Allof the above affects the number of dollars supplied in the foreign exchange market.

17) Suppose the target exchange rate set by the Fed is 150 yen per dollar. If the demand for dollars permanently decrease the fed
A) Can permanently meet the target by selling the dollar (B) Can permanently meet the target by buying the dollar (C) must violate both interest parity and purchasing power parity to permanently meet the target. (D) cannot permanently maintain the target rate.

18) The U.S interest rate minus the foreign interest rate is called _____
A) foreign interest rate differential (B) U.S bond rate differential (C) U.S interest rate differential (D) U.S stock yield differential

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