Chapter 12: Macroeconomics (page 428)
How do you calculate aggregate demand?
By taking the sum of all the four components of aggregate demand
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What does this say about the causes of the recessions in each case?
Describe the short-run effects of each of the following shocks on the aggregate price level and on aggregate output.
a. The government sharply increases the minimum wage, raising the wages of many workers.
b. Solar energy firms launch a major program of investment spending.
c. Congress raises taxes and cuts spending.
d. Severe weather destroys crops around the world.
Suppose someone says, “Using monetary or fiscal policy to pump up the economy is counterproductive —you get a brief high, but then you have the pain of inflation.”
a. Explain what this means in terms of the AD-AS model.
b. Is this a valid argument against stabilization policy? Why or why not?
What is the national income multiplier?
In 2008, in the aftermath of the collapse of the housing bubble and a sharp rise in the price of commodities, particularly oil, there was much internal disagreement within the Fed about how to respond, with some advocating lowering interest rates and others contending that this would set off a rise in inflation. Explain the reasoning behind each one of these views in terms of the AD-AS model.
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