Will a rightward shift in aggregate demand result in long-run economic growth? Why?
What will be an ideal response?
No. In the long run, the aggregate supply curve is vertical at the natural rate of output or full employment. An increase in aggregate demand will not change the level of output, but it will cause the price level to increase. Only a rightward shift in the long-run aggregate supply curve will result in long-run economic growth or increased capacity.
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The accompanying supply-demand diagram shows the market for calculators. The initial price of calculators is P0, and the initial quantity exchanged is Q0.
Which of the following situations could be correctly illustrated by the diagram?
a. Graphing capabilities and other new features lead people to buy more calculators.
b. The cost of memory chips used in calculators falls, lowering the price of calculators.
c. Personal computerized notepads with substantial computing power are introduced, reducing people's need for calculators.
d. A heavy tariff is placed on calculators imported from overseas.
People complain that inflation increases the cost of goods and services and therefore reduces their purchasing power. If inflation and income grow at the same rate, is this complaint valid? Explain carefully
What will be an ideal response?
Suppose we were analyzing the Turkish lira per euro foreign exchange market. If the Euro-Area's price level falls relative to Turkey and nothing else changes, then the:
a. The supply of euros in the foreign exchange market falls, and the demand for euros in the foreign exchange market rises, causing an appreciation of the euro. b. The supply of euros in the foreign exchange market rises, and the demand for euros in the foreign exchange market falls, causing an appreciation of the euro. c. The supply of euros in the foreign exchange market rises, and the demand for euros in the foreign exchange market rises, causing an uncertain change in the value of the euro. d. The supply of euros in the foreign exchange market rises, and the demand for euros in the foreign exchange market falls, causing a depreciation of the euro. e. Neither supply nor demand in the foreign exchange market change because relative international prices influence trade flows and not the exchange rate.
Exhibit 17-2 Aggregate demand and aggregate supply curves
As shown in Exhibit 17-2, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD1 to AD2 will cause:
A. labor to adjust nominal wages immediately. B. the aggregate supply curve to shift from SRAS1 to SRAS2 C. the price level to eventually fall from 110 to 100. D. real GDP to rise from $6 trillion to $6.5 trillion permanently.