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Macroeconomics review: AD-AS, unemployment, inflation

1. Determine whether each of the following would cause a shift of the aggregate demand curve, a shift of the aggregate supply curve, neither, or both. Which curve shifts, and in which direction? What happens to aggregate output and the price level in each case?

a. The price level changes
i. Which curve shifts?
ii. Which direction does it shift?
iii. What happens to aggregate output?
iv. What happens to the price level?

b. Consumer confidence declines
i. Which curve shifts?
ii. Which direction does it shift?
iii. What happens to aggregate output?
iv. What happens to the price level?

c. The supply of resources increases
i. Which curve shifts?
ii. Which direction does it shift?
iii. What happens to aggregate output?
iv. What happens to the price level?

d. The wage rate increases
i. Which curve shifts?
ii. Which direction does it shift?
iii. What happens to aggregate output?
iv. What happens to the price level?

2. Determine whether the following statements are true or false.
i. Some people who are officially unemployed are not in the labor force.
ii. Some people in the labor force are not working.
iii. Everyone who is not unemployed is in the labor force.
iv. Some people who are not working are not unemployed.

3. Refer to the following data on the U.S. consumer price index and answer the questions below.
Year CPI Year CPI Year CPI Year CPI
1988 118.3 1993 144.5 1998 163.0 2003 184.0
1989 124.0 1994 148.2 1999 166.6 2004 188.9
1990 130.7 1995 152.4 2000 172.2 2005 195.3
1991 136.2 1996 156.9 2001 177.1 2006 201.8
1992 140.3 1997 160.5 2002 179.9

a. Compute the inflation rate for each year 1989-2006.

Solution Preview

1. Determine whether each of the following would cause a shift of the aggregate demand curve, a shift of the aggregate supply curve, neither, or both. Which curve shifts, and in which direction? What happens to aggregate output and the price level in each case?

a. The price level changes
i. Which curve shifts?
Neither.
ii. Which direction does it shift?
It doesn't.
iii. What happens to aggregate output?
In the long run it returns to equilibrium.
iv. What happens to the price level?
In the long run it returns to equilibrium.

b. Consumer confidence declines
i. Which curve shifts?
AD.
ii. Which direction does it shift?
Left.
iii. What happens to aggregate output?
...

Solution Summary

This solution gives the answers to 3 common questions found on Macroeconomics exams. The topics covered are:

Aggregate Demand & Aggregate Supply
The unemployment rate
The inflation rate

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