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a. The AD/AS model describes changes in the economy by relating real GDP (output) and the price level.
(i) Compare and contrast the Keynesian portion of the AD/AS model with the classical portion of the AD/AS model, and explain how the level of production is determined in each situation. Use graphs to explain your answer.
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(ii) Compare and contrast changes in aggregate demand and changes in aggregate supply in the AD/AS model. Use graphs to explain your answer.
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b. Say that, for a variety of reasons, the government shows it is not up to the task of conducting fiscal policy. The central bank steps up and does something about it. If a 1% decrease in interest rates leads to an increase in investment of $50B, how should the central bank's interest rate targets change?
3. In Country X, GDP is $400B below the full-employment level of output. Government officials have measured the marginal propensity to consume at 0.75.
a. The government wants to use fiscal policy to bring the economy back to full employment.
(i) If the government wants to achieve this through a change in spending, what change would be necessary?
(ii) If the government wants to achieve this through a change in taxes, what change would be necessary?
(iii) If the government wants to achieve this without creating a budget deficit, what change would be necessary?
c. Many people believe trade deficits are a serious problem and need to be eliminated.
(i) Explain the three actions the Fed could take to reduce the trade deficit in the U.S., and explain carefully how these actions would result in a reduced trade deficit.
(ii) What effect would these three actions from part I of the question have on GDP? Describe the effects on each of the components of aggregate demand. Include an AD/AS graphical analysis of your answer.
2. The U.S. economy experienced large trade deficits in the 1980s and 1990s and tremendous economic growth in the mid- and late-1990s.
a. Trade deficits have an effect on inflation. Explain the relationship between trade deficits and investment verbally and mathematically using the concept of the balance of payments.
b. Explain verbally the relationship between investment and long-term economic growth and describe the relationship graphically in an AD/AS graph.
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c. Consider the relationship between interest rates and inflation.
(i) Explain the difference between real and nominal interest rates.
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(ii) If the Fed takes actions that will change interest rates, how is this likely to affect inflation?
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(i) Compare and contrast the Keynesian portion of the AD/AS model with the classical portion of the AD/AS model, and explain how the level of production is determined in each situation. Use graphs to explain your answer.
Answer:
(ii) Compare and contrast changes in aggregate demand and changes in aggregate supply in the AD/AS model. Use graphs to explain your answer.
b) How much will it charge?
c) Can you determine its profit per day? (Hint: you can; state how much it is.)
d) Suppose a tax of $1,000 per day is imposed on the firm. How will this affect its price?
e) How would the $1,000 per day tax its output per day?
f) How would the $1,000 per day tax affect its profit per day?
g) Now suppose a tax of $100 per unit is imposed. How will this affect the firm’s price?
h) How would a $100 per unit tax affect the firm’s profit maximizing output per day?
Derive equations for MR MC ATC and graph along with the demand curve
