‭ P Macroeconomics Assignment: Apply Concepts of Short-Run Equilibrium‬

A
‭Page 1 of 7‬
‭User Name: (print clearly) _Clara Bui___ Instructor: _Young Kim____ Date:__Nov 27th,‬
‭2023________‬

‭ . The intersection of AS and AD is an equilibrium. This means that, unless there’s an‬
1
‭outside shock to the system, the price level and RGDP will remain at the equilibrium levels.‬
‭Further, if the price level is higher or lower than equilibrium there are forces that will work to‬
‭bring it back toward equilibrium.‬

‭ . If the price level is above the equilibrium price level, how does the aggregate‬
A
‭quantity of goods and services demanded compare to the aggregate quantity of goods and‬
‭services supplied at the price level? Is this a condition of equilibrium? If not, then what‬
‭mechanism allows the economy to move toward equilibrium? (6 points)‬

‭If the price level is above the equilibrium, the aggregate quantity demanded will be‬
l‭ess than the aggregate quantity supplied. This is not a condition of equilibrium. The‬
‭mechanism that allows the economy to move toward equilibrium is a decrease in prices. As‬
‭prices fall, consumers are more willing to buy, increasing aggregate demand and moving the‬
‭economy back to equilibrium.‬

‭ . If the price level is below the equilibrium price level, how does the aggregate‬
B
‭quantity of goods and services demanded compare to the aggregate quantity of goods and‬
‭services supplied at the price level? Is this a condition of equilibrium? If not, then what‬
‭mechanism allows the economy to move toward equilibrium? (6 points)‬

I‭f the price level is below the equilibrium, the aggregate quantity demanded exceeds‬
‭the aggregate quantity supplied. This is also not a condition of equilibrium. The mechanism‬
‭to move toward equilibrium is an increase in prices. Higher prices encourage producers to‬
‭supply more, aligning aggregate demand and supply and returning the economy to‬
‭equilibrium.‬

‭ ssignment: Apply Concepts of Short-Run Equilibrium‬

A
‭User Name:_______________ Instructor: _________________ Date:__________‬
‭(print clearly)‬

‭ . Governments sometimes try to change government spending or taxes to affect real output‬
2
‭and the price level.‬

‭ . If the government wants to use either government spending or taxes paid by‬
A
‭households to increase aggregate demand, how should G change and how should T‬
‭change? (4 points)‬

‭To increase aggregate demand, the government should increase government‬

‭ pending (G) or reduce taxes (T). Both actions inject more money into the economy,‬
s
‭stimulating demand.‬
 ‭ . If the government wants to use either government spending or taxes paid by‬
B
‭households to decrease aggregate demand, how should G change and how should T‬
‭change? (4 points)‬

‭ o decrease aggregate demand, the government should decrease government‬

T
‭spending (G) or increase taxes (T). Both measures reduce the disposable income of‬
‭households, leading to decreased spending and a decline in aggregate demand.‬

‭ age 3 of 7 Assignment: Apply Concepts of Short-Run Equilibrium User‬

P
‭Name:_______________ Instructor: _________________ Date:__________ (print clearly)‬

‭ . In the late 1990s, the U.S. economy consistently saw increasing wages and increasing‬
3
‭worker productivity.‬

‭A. If wages rise, how does aggregate supply change? (4 points)‬

‭If wages rise, aggregate supply decreases due to increased production costs.‬

‭B. If productivity rises, how does aggregate supply change? (4 points)‬

I‭f productivity rises, aggregate supply increases as more output can be produced‬
‭ ith the same input.‬
w

‭ . Can you determine the net effect of increases in both workers' wages and‬
C
‭workers' productivity? How could you look at the economy and determine which (if either) of‬
‭the two effects dominates the other, ceteris paribus? (4 points)‬

‭No, it depends on the size of the changes‬

‭ age 4 of 7 Assignment: Apply Concepts of Short-Run Equilibrium User‬

P
‭Name:_______________ Instructor: _________________ Date:__________ (print clearly)‬

‭ . Use the AS/AD model to describe the effect of each of the following events on the‬
4
‭economy of Snezhanka (a fictitious nation). Beginning with the economy in equilibrium‬
‭carefully show the shift involved and the new equilibrium. State whether the P (price level)‬
‭and RGDP at the new equilibrium are higher or lower. For each part of this question, start‬
‭again at the original equilibrium. What will happen if:‬
‭A. Taxes on households are decreased? (3 points)‬

Decreasing taxes on
households increases
disposable income, boosting
consumer spending, and
shifting AD to the right.

‭B. Taxes paid by firms are decreased? (3 points)‬

Decreasing taxes paid by firms

reduces production costs,
encouraging more output, and
shifting AS to the right.

‭ . The value of the national currency, the Snezhankan lev, declines in the‬
C
‭international currency market? (3 points)‬

A decline in the value of the

national currency may increase
exports, shifting AD to the
right.
 ‭D. A revolutionary new machine, the aparat, increases worker productivity? (3 points)‬

A revolutionary machine
increasing productivity shifts
AS to the right.

‭ age 6 of 7 Assignment: Apply Concepts of Short-Run Equilibrium User‬

P
‭Name:_______________ Instructor: _________________ Date:__________ (print clearly)‬

‭5. Let’s consider the effects of immigration on an economy.‬

‭A. Imagine that a large number of people immigrate to a country, but the government‬
‭ oesn't allow them to work. What effect will this have on the AS/AD model? Answer with a‬
d
‭graph and in words. (6 points)‬

If immigrants are not allowed

to work, there is little impact on
AD or AS. With no change in
productive capacity, both
RGDP and P remain relatively
unchanged.

‭ . Now begin again and imagine a large number of people immigrate to a country,‬
B
‭but the government requires that they all find jobs. What effect will this have on the AS/AD‬
‭model? Answer with a graph and in words. (6 points)‬
 If immigrants are required to
find jobs, AD increases due to
higher consumer spending. AS
may also increase if
immigrants contribute to
productivity. This can lead to
higher RGDP and potentially
higher prices.

‭ . How will the effect of immigration on RGDP and P differ if the immigrants are‬
C
‭allowed to work instead of prohibited from working? (4 points)‬

Allowing immigrants to work could positively impact RGDP if they contribute to production, potentially
leading to a higher P if demand outpaces supply.