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Chapter 11: Q. 2 - For Critical Thinking (page 248)

Why do you suppose that the effects of the minimumwage-generated aggregate supply shock in Puerto Rico have persisted for several years? (Hint: The minimum wage persistently has exceeded market clearing wages for a significant fraction of the Puerto Rican labor force.)

Short Answer

Expert verified

Currency dynamics have limited effect on equilibrium GDP due to large enterprises' ability to adapt to depreciation/appreciation.

Step by step solution

01

Step; 1 Supply shock:

Large enterprises have grown in importance in the economy, notably in terms of share of their net sales in real GDP, which has climbed in recent years. Connect this to the notion that these huge corporations are better at protecting exports and imports from currency depreciation or appreciation.

02

Step: 2 Conclusion:

This has improved the economy's ability to withstand aggregate supply shocks. Currency dynamics have limited effect on equilibrium GDPdue to large enterprises' ability to adapt to depreciation/appreciation.

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Most popular questions from this chapter

Take a look at Figure 11-4. If the Federal Reserve increases the quantity of money in circulation sufficiently to generate a rightward shift in the aggregate demand curve by $0.5trillion, will actual equilibrium real GDP rise by this amount in the classical model? Explain.

Consider Figure 11-9. Suppose that businesses in this nation initially had been exporting significant amounts of domestically produced goods and services abroad. Assume that other nations of the world have experienced a sudden decline in economic conditions. What happens to the nation's aggregate demand curve? In the short run, will the nation experience an inflationary gap or a recessionary gap? Explain.

Why do you suppose that a number of economists are advising the Bank of Japan to boost the nation's money supply when the government implements its additional consumption tax increase?

Consider an open economy in which the aggregate supply curve slopes upward in the short run. Firms in this nation do not import raw materials or any other productive inputs from abroad, but foreign residents purchase many of the nation's goods and services. What is the most likely short run effect on this nation's economy if there is a significant downturn in economic activity in other nations around the world?

As in Problem 11-6, suppose that there is a temporary, but significant, increase in oil prices in an economy with an upward-sloping SRAS curve. In this case, however, suppose that policymakers wish to prevent equilibrium real GDP 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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