ECON10003 Introductory Macroeconomics 1

ECON10003
INTRODUCTORY MACROECONOMICS
SEMESTER 2, 2019

TUTORIAL 7
WEEK STARTING SEPTEMBER 16TH, 2019
PRE-TUTORIAL WORK

THE TUTORIAL
This week’s tutorial looks at the AD-AS model.

Note that your tutor is under no obligation to go through the answers to the pre-
tutorial work in detail. The focus in the tutorial will be on the tutorial work itself - the
questions here are preparatory.

ASSESSMENT
Your preparation for Tutorial 7 will be taken into account when assessing your
tutorial participation (10% of your overall mark for this subject will be based on your
tutorial participation). You must be able to produce evidence in the form of written
answers or notes to this pre-tutorial work when requested by your tutor. If you are
unable to provide this evidence of preparation, you will receive half the participation
marks you would otherwise have received for this tutorial.

READING GUIDE
Review Chapter 11 of BOFAH (5th edition) as preparation for this tutorial. This is
available from the LMS (Readings Online). You should also look carefully over your
lectures notes for Week 7.

KEY CONCEPTS
Aggregate demand, Aggregate supply, Short run equilibrium, Long run equilibrium

Pre Tutorial Work

ECON10003 Introductory Macroeconomics 2

PROBLEMS

1. The expected rate of inflation, π et , is a key variable in our textbook version of

the AD-AS model. According to the textbook, what determines people’s
expectations of the rate of inflation? What is the justification for this
assumption?

2. Why is the SRAS curve horizontal in the context of the AD-AS model? Why
is the LRAS curve vertical in the context of the AD-AS model?

3. In the context of AD-AS analysis:

a. What do we mean by “short-run equilibrium”?
b. What do we mean by “long-run equilibrium”?

4. An economy’s aggregate demand curve is given by the following relationship:

Yt = 13,000 – 20,000πt. The economy’s potential output is 12,000. Initially the
rate of inflation is 4 per cent. That is, πt = 0.04.
a. What is the initial short-run equilibrium level of output? At that level
of output and that rate of inflation is the economy in long run
equilibrium? If not, is the output gap contractionary or expansionary?
What would you expect to happen to the rate of inflation in the long
run? To the expected rate of inflation?
b. What will be the rate of inflation and the level of output in long run
equilibrium?

5. Holding all else constant, and using the AD-AS model, what are the short run
and long run effects of each of the following? For your analysis assume that
the economy begins in an equilibrium with output equal to the natural rate and
actual inflation equal to expectations.
a. A loss of business confidence
b. An increase in the size of the budget deficit
c. An increase in the expected rate of inflation
d. An international crisis that raises the price of oil

6. The last few weeks of lectures have focused upon a Keynesian theory of the
macroeconomy. This has covered the Keynesian Cross Diagram, Monetary
Policy, Fiscal Policy, and the AD-AS model. Please construct a question about
this section of the course that would be appropriate for a tutorial, assignment
or exam question. In tutorials, groups will select the most interesting question
from among group members and tutors will lead a discussion of the most
interesting question(s).

Pre Tutorial Work