1) Draw an “aggregate supply-aggregate demand” diagram that shows an economy suffering from highlevels of unemployment. Show the effects of the following events on the Aggregate Demand curve.
a) An increase in RGDP in Europe and Japan
b) A decline in U.S. households’ expectations of their future income.
c) A reduction in Medicaid and Medicare benefit levels.
d) An increase in business expectations of future aggregate demand growth
e) An increase in government spending on military hardware
f) A sharp decline in the value of foreign currencies relative to the value of the $.
g) A decline in the prices of real estate and existing residential housing.
h) A rise in the price level due to a sharp increase in the price of oil.
2) Explain carefully why an initial change in aggregate demand will shift the aggregate demand function by a multiple of the initial change in output.
3) Suppose that two economies initially have the same level of real income and both suffer unanticipated declines in their sales of exports of $50 billion. Country “A” has higher tax rates and a higher level of government spending than economy “B”. Otherwise, the two economies are similar in every respect. Which country will suffer the greatest decline in employment as a result of the decline in exports? (Hint: think about multiplier effects and which country will have the higher multiplier!)
4) Agree or disagree and explain: “The Aggregate Demand for goods and services in an economy must at every moment equal the value of Real Gross Domestic Product because both are defined to be the sum of (C+I+G+X-IM).”
5) Why do economists attempting to forecast short run future changes in real GDP and employment look closely at data on business inventories and unfilled orders?
What conclusion could be drawn if the volume of unfilled orders and average length of delivery times decreased while inventories increased dramatically?
6) Agree or disagree and explain. “The AD schedule slopes downward because real income rises as the price level declines and everybody buys more as their real income rises.”
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