Supply and Demand and Aggregate Demand Curve

Topics: Supply and demand, Inflation, Aggregate demand Pages: 6 (881 words) Published: June 17, 2014
Minghao Feng
ECO 102 B
Assignment #6


Here you will find questions related to chapter 27.
a Assume that employers and workers agree that real wages should rise by 2% next year. If inflation is expected to be 2% next year, what will workers ask for in regard to wages next year?

From the question we know that employers and workers want to raise real wages by 2%. But inflation will be 2% in next year. Actually, the employers and workers do not changer their real wages, so they shod ask for the real wages rise to 4%.

b If inflation is expected to be 4% next year, rather than 2%, what will workers ask for?

They should ask the real wages rise to 6%.

c Use your answers from parts a and b to explain how an increase in expected inflation will affect the following year’s actual rate of inflation. An increase in expected inflation raises inflation because firms and workers care about real prices and wages when they set nominal prices and wages. If expected inflation is higher, newly set prices and wages will be higher.

d Draw the relevant AS curves showing what will happen if expected inflation falls. Label everything and discuss (typed).

When the inflation falls, the AS curves shit upward, because the price level will increase. SECTION TWO:2 points
Explain for each event whether it changes the short-run aggregate supply, long-run aggregate supply, or a combination of the two, and why.

a) Automotive firms in the United States switch to a new technology that raises productivity.

Technological change enables firms to produce more from any given amount of facts of production. Therefore, technology increases potential GDP. So, an increase in potential GDP increases both- long run aggregate supply and short- run aggregate supply.

b)Toyota and Honda build additional plants in the United States.

Toyota and Honda build more plants in the United States; it is an increase the quantity of capital. So it will increase potential GDP. Increasing both- long run aggregate supply and short- run aggregate supply. c)The price of auto parts imported from China rise.

When the price rise change the quantity of real GDP supplied, which does a movement along the short-run aggregate supply curve illustrate. The short-run aggregate supply will increase; but it does not change aggregate supply.

d) Autoworkers agree to a cut in the nominal wage rate.

A decrease in the nominal wage rate increase short-run aggregate supply; it does not change the long-run aggregate supply. Because it decreases firm’s costs.

In Japan, potential GDP is 600 trillion yen. The table shows the aggregate demand and short-run aggregate supply schedules.

f)Draw a graph of the aggregate demand curve and the short-run aggregate supply curve.

g) What is the short-run equilibrium real GDP and price level?

Equilibrium real GDP is ¥500 trillion and the price level is 95. Short-run macroeconomic equilibrium occurs at the intersection of the aggregate demand curve and the short-run aggregate supply curve.

h) Does Japan have an inflationary gap or a recessionary gap and what is its magnitude?

Equilibrium real GDP is less than potential GDP, so Japan has a recessionary gap. The recessionary gap equals the difference between potential GDP and real GDP, which is ¥100 trillion. SECTION THREE: 2 points

Regarding the AS/AD model and assuming full employment:
a C and I fall. What happens to the price level, to real GDP, and interest rates? Which curve shifts and in which direction? Why?

When the C and I fall, the price level will decrease, real GDP will decrease, the interest rate will raise. The AS does not change, because potential GDP doesn't change.

b 1999-2006 sees a housing boom. What is the effect on consumption, real GDP, and AD? Which curve shifts and in which direction? Why?

The consumption...
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