Economics (McConnell), 18th Edition

Chapter 29: Aggregate Demand and Aggregate Supply (+ Appendix)

Key Questions

1. Suppose that the aggregate demand and aggregate supply schedules for a hypothetical economy are as shown below:

1. Use these sets of data to graph the aggregate demand and aggregate supply curves. What is the equilibrium price level and the equilibrium level of real output in this hypothetical economy? Is the equilibrium real output also necessarily the full-employment real output? Explain.
2. Why will a price level of 150 not be an equilibrium price level in this economy? Why not 250?
3. Suppose that buyers desire to purchase $200 billion of extra real output at each price level. Sketch in the new aggregate demand curve as AD₁. What factors might cause this change in aggregate demand? What is the new equilibrium price level and level of real output?

2. Suppose that a hypothetical economy has the following relationship between its real output and the input quantities necessary for producing that output:

1. What is productivity in this economy?
2. What is the per-unit cost of production if the price of each input unit is $2?
3. Assume that the input price increases from $2 to $3 with no accompanying change in productivity. What is the new per-unit cost of production? In what direction would the $1 increase in input price push the economy's aggregate supply curve? What effect would this shift of aggregate supply have on the price level and the level of real output?
4. Suppose that the increase in input price does not occur but, instead, that productivity increases by 100 percent. What would be the new per-unit cost of production? What effect would this change in per-unit production cost have on the economy's aggregate supply curve? What effect would this shift of aggregate supply have on the price level and the level of real output?

6. What effects would each of the following have on aggregate demand or aggregate supply? In each case use a diagram to show the expected effects on the equilibrium price level and the level of real output. Assume all other things remain constant.

1. A widespread fear of depression on the part of consumers.
2. A $2 increase in the excise tax on a pack of cigarettes.
3. A reduction in interest rates at each price level.
4. A major increase in Federal spending for health care.
5. The expectation of rapid inflation.
6. The complete disintegration of OPEC, causing oil prices to fall by one-half.
7. A 10 percent reduction in personal income tax rates.
8. A sizable increase in labor productivity (with no change in nominal wages).
9. A 12 percent increase in nominal wages (with no change in productivity).
10. Depreciation in the international value of the dollar.

3. Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run?

1. An increase in aggregate demand.
2. A decrease in aggregate supply, with no change in aggregate demand.
3. Equal increases in aggregate demand and aggregate supply.
4. A decrease in aggregate demand.
5. An increase in aggregate demand that exceeds an increase in aggregate supply.

Chapter 29 Key Question Solutions (53.0K)