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1. What is the multiplier if the marginal propensity to consume is:
A fall in the value of the dollar against other currencies makes U.S. final goods and services cheaper to foreigners even though the U.S. aggregate price level stays the same. As a result, foreigners demand more American aggregate output. Your study partner says that this represents a movement down the aggregate demand curve because foreigners are demanding more in response to a lower price. You, however, insist this represents a rightward shift of the aggregate demand curve. Who is right? Explain.
Suppose that the economy is currently at potential output. You are an economic policy-maker and a college intern asks you to rank the possible types of “shocks” in order from most preferred to least preferred. How would you rank them and why?
Determine the effect on aggregate demand (AD) of each of the following events. Explain whether it represents an upward or downward movement along the AD curve or a leftward or rightward shift of the AD curve.
A rise in the interest rate caused by a change in monetary policy
A fall in the real value of money in the economy due to a higher aggregate price level
News of a worse-than-expected job market next year
A fall in tax rates
A rise in the real value of assets in the economy due to a lower aggregate price level
A rise in the real value of assets in the economy due to a surge in real estate values
a. Explain whether it represents an upward or downward movement along the SRAS curve or a leftward or rightward shift of the SRAS curve. all workers sign annual contracts each year on January 1. A rise in legally mandated retirement benefits paid to workers leads producers to reduce output . a new computer operating system is introduced that increases labor productivity dramatically. Determine the effect on short-run aggregate supply of each of the following events. What will happen when firms and workers renegotiate their wages? 6. In the short-run. In late January. Explain and illustrate how Wageland will move from an initial short-run equilibrium to another. No matter what happens to prices of final goods and services during the year. Suppose that in Wageland all workers sign annual contracts each year on January 1.AP Macroeconomics Unit 4 Review 5. prices of final goods and services fall unexpectedly after the contracts are signed. Answer the following questions using a diagram and assume the economy starts at potential output. how will the quantity of aggregate output supplied respond to the fall in prices? b. all workers earn the wage specified in their annual contract. This year. A fall in the price of oil leads producers to increase output c. a. 7. In Wageland. A rise in the consumer price index (CPI) leads producers to increase output b.
. a. The number of weeks an unemployed person is eligible for unemployment benefits is increased c. a. determine whether the policy is an expansionary or contractionary fiscal policy. The government sharply increases the minimum wage b. In each of the following cases.AP Macroeconomics Unit 4 Review 8. Explain why federal disaster relief. which together employ thousands of people. are closed b. Congress raises taxes and cuts spending d. The federal tax on gasoline is increased 10. will stabilize the economy more effectively after a disaster than relief that must be legislated. Describe the short-run effects of each of the following shocks on the aggregate price level and on aggregate output. Several military bases around the country. which quickly disburses funds to victims of natural disasters such as hurricanes. Severe weather destroys crops around the world 9. Solar energy firms launch a major program of investment spending c. floods and large-scale crop failures.
either a recessionary or inflationary gap exists. Anticipating the possibility of war. 14. potential output = $200 billion. Firms come to believe that a recession in the near future is likely c. Explain why a $500 million reduction in government purchases of goods and services will generate a larger fall in real GDP than a $500 million tax increase. The quantity of money in the economy declines and interest rates increase . Real GDP = $180 billion. 13. Be sure to indicate how your recommended fiscal policy would shift the aggregate demand curve. An economy is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs.8 12. A stock market boom increases the value of stocks held by households b. the government increases its purchases of military equipment d. Real GDP = $250 billion.75 b. potential output = $160 billion. MPC = 0.5 c. Real GDP = $100 billion. MPC = 0. a. Identify what kind of gap (inflationary or recessionary) will the economy face after the shock and what type of fiscal policies would help move the economy back to potential output. In each of the following cases. Calculate both the change in government spending on goods and services and the change in government transfers necessary to close each gap: a. potential output = $100 billion.AP Macroeconomics Unit 4 Review 11. MPC = 0. Explain why a $500 million increase in government purchases of goods and services will generate a larger rise in real GDP than a $500 million increase in government transfers.