MCD 2090 Macroeconomics (week 7)

Tutorial 7: Aggregate Demand and Aggregate Supply Analysis (Chapter 10)

Section A – Homework
1. Explain the three reasons why the aggregate demand (AD) curve slopes downward.

2. Explain how each of the following events would affect the AD curve.
a. An increase in the price level
b. An increase in government purchases
c. Higher income taxes
d. Higher interest rates
e. Faster income growth in other countries

3. Explain why the long-run aggregate supply (LRAS) curve is vertical.

4. Explain how each of the following events would affect the LRAS curve.
a. A higher price level
b. An increase in the size of the labour force
c. An increase in the quantity of capital goods
d. Technological change

5. Why does the short-run aggregate supply (SRAS) curve slope upwards?

6. Explain how each of the following events would affect the SRAS curve.
a. An increase in the price level
b. An expectation of a higher price level in the future
c. A price level that is currently higher than expected
d. An unexpected increase in the price of an important raw material
e. An increase in the size of the labour force

Section B
7. What is the relationship between the AD, SRAS and LRAS curves when the economy is in
equilibrium?

© Monash College Page 1 of 4

8. Using AD-AS model, illustrate the impact of increasing AD on the price level, real GDP
and unemployment in the short-run. Identify the state of the economy. Analyse the long-run
adjustment.

9. Using AD-AS model, illustrate the impact of decreasing AD on the price level, real GDP
and unemployment short-run. Identify the state of the economy. Analyse the long-run
adjustment.

10. Using AD-AS model, illustrate the impact of increasing SRAS on the price level, real
GDP and unemployment short-run. Identify the state of the economy. Analyse the long-run
adjustment.

11. Using AD-AS model, illustrate the impact of decreasing SRAS on the price level, real
GDP and unemployment short-run. Identify the state of the economy. Analyse the long-run
adjustment.

12. Use the following graph to answer these questions.

a. Which of points A, B, C or D can represent a long-run equilibrium?

b. Suppose initially the economy is at point A. If aggregate demand increases from AD1 to
AD2, which point represents the economy’s short-run equilibrium? Which point represents the
eventual long-run equilibrium? Briefly explain how the economy adjusts from the short-run
equilibrium to the long-run equilibrium.

13. Draw a basic aggregate demand and aggregate supply graph (with LRAS constant) that
shows the economy in long-run equilibrium. Assume that there is a large decrease in the
demand for exports. Show the resulting short-run equilibrium on your graph. In this short-run
equilibrium, is the unemployment rate likely to be higher or lower than it was before the
decrease in exports? Briefly explain. Explain how the economy adjusts back to long-run
equilibrium. When the economy has adjusted back to long-run equilibrium, how have the
values of each of the following changed relative to what they were before the increase in
exports?
i. Real GDP

© Monash College Page 2 of 4

ii. The price level
iii. The unemployment rate

14. Draw a basic aggregate demand and aggregate supply graph (with LRAS constant) that
shows the economy in long-run equilibrium. Assume that there is an unexpected increase in
the price of oil. Show the resulting short-run equilibrium on your graph. Explain how the
economy adjusts back to long-run equilibrium. In this short-run equilibrium, is the
unemployment rate likely to be higher or lower than it was before the increase in oil prices?
Briefly explain. When the economy has adjusted back to long-run equilibrium, how have the
values of each of the following changed relative to what they were before the unexpected
increase in the price of oil?
i. Real GDP
ii. The price level
iii. The unemployment rate

15. Draw a dynamic aggregate demand and aggregate supply graph showing the economy
moving from potential GDP in 2014 to potential GDP in 2015, with no inflation. Your graph
should contain the AD, SRAS and LRAS curves for both 2014 and 2015 and should indicate the
macroeconomic equilibrium for each year and the directions in which the curves have shifted.
Identify what must happen to have growth during 2015 without inflation.

When answering questions based on articles, please note the following steps;
Step 1: Read all the questions from the article.
Step 2: Number all the paragraphs in the article
Step 3: Browse through the article and match the questions and the paragraphs
Step 4: Write the answers to the questions
(Do not try to understand each and every word in the article)

16. Read the article and answer the following questions

i. Why housing construction and renovation has increased the sales of household goods from
Harvey Norman?
ii. According to Gerry Harvey, what is the status of their businesses in different states?
iii. Draw a basic aggregate demand and aggregate supply graph (with LRAS constant) that
shows the economy in long-run equilibrium. Assume that there is a large increase in the demand
for household goods. Show the resulting short-run equilibrium on your graph. In this short-run
equilibrium, is the unemployment rate likely to be higher or lower than it was before the
increase in household goods? Briefly explain. Explain how the economy adjusts back to long-
run equilibrium. When the economy has adjusted back to long-run equilibrium, how have the
values of each of real GDP, price level and unemployment rate changed relative to what they
were before the increase in demand for household goods?

© Monash College Page 3 of 4

THE SYDNEY MORNING HERALD 31 AUGUST 2016
Housing boom lifts Harvey Norman’s profit
by Petrina Berry
A boom in housing construction and renovation has driven a surge in Harvey Norman’s
furniture, whitegoods and homewares’ sales.
Harvey Norman’s net profit rose 30 per cent to $348.6 million in the year to June 30, as sales
revenue growth for its franchisees in Australia more than doubled from the previous year.
Franchisee sales revenue rose almost eight per cent to $5.3 billion, while a near $50 million
rise in the value of Harvey Norman’s properties also contributed to profit growth.
The company expects housing conditions in Australia to remain strong and to continue to drive
its sales growth with the eight weeks of the current financial year already showing strong signs
with sales up 6.4 per cent and comparable sales up 6.6 per cent from the same period a year
ago.
Chairman Gerry Harvey said computers, televisions, refrigerators, bedding and furniture were
all selling strongly as low interest rates and population growth help fuel a property boom.
‘Every three and a bit years you get an extra million people in Australia and that doesn’t look
like changing.
‘Consumer confidence is also strong. At the moment, Melbourne and Sydney are the
powerhouses of our business.’
He said housing activity was likely to remain solid thanks to a strong number of building
approvals, particularly in NSW and Victoria.
The mining downturn has dented sales growth from the group’s Queensland and WA stores,
he added.
Mr Harvey said the business has also benefited from the growing demand for technology,
particularly devices connected to the Internet. Smart watches, smartphones and wearable
fitness technology are among the group’s hottest selling consumer electronic devices.
‘(That’s) as well as the big advances in televisions; the curved screen and home theatre, which
cost substantially less than what they did 10 years ago.’
Impressed investors drove Harvey Norman’s shares to an eight-year high, adding 14 cents, or
2.7 per cent, (to) $5.38.
Source: Petrina Berry (2016), ‘Housing boom lifts Harvey Norman’s profit’, The Sydney
Morning Herald, 31 August, ©2017 AAP. <at www.smh.com.au/breaking-news-
business/housing-boom-lifts-harvey-normans-profit-20160831-4k0b6.html>; viewed 28
October 2016.

17. Complete Post-class homework after watching the video.

© Monash College Page 4 of 4