Chapter 11: Q. 11.1 (page 232)
Describe the short-run determination of equilibrium real and the price level in the classical model
A rise in aggregate demand, according to the traditional model, will result in a rise in price level.
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Between early and late , total planned expenditures by . households substantially increased in response to an increase in the quantity of money in circulation. Explain, from a short-run Keynesian perspective, the predicted effects of this event on the equilibrium price level and equilibrium . real. Be sure to discuss the spending gap that the Keynesian model indicates would result in the short run.
As in Problem , suppose that there is a temporary, but significant, increase in oil prices in an economy with an upward-sloping curve. In this case, however, suppose that policymakers wish to prevent equilibrium real from changing in response to the oil price increase. Should they increase or decrease the quantity of money in circulation? Why?
For each question that follows, suppose that the economy begins at point A. Identify which of the other points on the diagram-point B, C, D, or E-could represent a new short-run equilibrium after the described events take place and move the economy away from point A. Briefly explain your answers.
a. Most workers in this nation's economy are union members, and unions have successfully negotiated large wage boosts. At the same time, economic conditions suddenly worsen abroad, reducing real GDP and disposable income in other nations of the world.
b. A major hurricane has caused short-term halts in production at many firms and created major bottlenecks in the distribution of goods and services that had been produced prior to the storm. At the same time, the nation's central bank has significantly pushed up the rate of growth of the nation's money supply.
c. A strengthening of the value of this nation's currency in terms of other countries' currencies affects both the SRAS curve and the AD curve.
How do you suppose that the increase in Japan's consumption tax rate affected the nation's equilibrium price level, other things being equal?
Suppose that there is a temporary, but significant, increase in oil prices in an economy with an upward-sloping curve. If policymakers wish to prevent the equilibrium price level from changing in response to the oil price increase, should they increase or decrease the quantity of money in circulation? Why?
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