Chapter 12: Q1. (page 466)
Why do you think gas prices rose in the recessions of the 1970s but fell after the Great Recession?
Gas prices rose in the 1970s recessions due to the artificially triggered oil crisis and fell after the Great Recession due to the drastic fall in demand capabilities of individuals
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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.
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?
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.
What are the 4 components of aggregate demand?
In the 1970s, Toyota was able to increase its American sales despite interest rates on auto loans surging as high as 17.5%. In contrast, after 2007, auto loan rates fell to their lowest levels in history; car sales also declined. Explain why. (Hint: Examine the connection between inflation and interest rates on loans.)
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