QUESTIONS AND PROBLEMS

1. What is Say’s law?  Does Say’s law apply more accurately in the long run or the short run?
2. What is Keynes’ law? Does Keynes’ law apply more accurately in the long run or the short run?
3. Why would an economist choose either the neoclassical perspective or the Keynesian perspective, but not both?
4. What is the intermediate zone of the SRAS curve? Will a rise in output be accompanied by a rise or a fall in the price level in this zone?
5. Explain why the short-run aggregate supply curve might be fairly flat in the Keynesian zone of the SRAS curve. How might we tell if we are in the Keynesian zone of the AS?
6. Explain why the short-run aggregate supply curve might be vertical in the neoclassical zone of the SRAS curve. How might we tell if we are in the neoclassical zone of the AS?
7. Why might it be important for policymakers to know which in zone of the SRAS curve the economy is?
8. In your view, is the economy currently operating in the Keynesian, intermediate or neoclassical portion of the economy’s aggregate supply curve?
9. What is the economic reason why the SRAS curve slopes up?
10. What are the components of the aggregate demand (AD) curve?
11. What are the economic reasons why the AD curve slopes down?
12. What is potential GDP?
13. Name some factors that could cause the SRAS curve to shift, and say whether they would shift SRAS to the right or to the left.
14. Will the shift of SRAS to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of SRAS to the left?
15. What is stagflation?
16. Economists watched the labor market continue to tighten going into the latter part of 2016 through the beginning of 2020. What would we expect to see happening to wages during that same time period. Assuming that this occurred and it was the only development in the labor market, how would this affect the AS curve? What if it was also accompanied by an increase in worker productivity?
17. If new government regulations require firms to use a cleaner technology that is also less efficient than what they previously used, what would the effect be on output, the price level, and employment using the AD/AS diagram?
18. During spring 2016 the Midwestern United States, which has a large agricultural base, experiences above-average rainfall. Using the AD/AS diagram, what is the effect on output, the price level, and employment?
19. Hydraulic fracturing (fracking) has the potential to significantly increase the amount of natural gas produced in the United States. If a large percentage of factories and utility companies use natural gas, what will happen to output, the price level, and employment as fracking becomes more widely used?
20. If firms become more optimistic about the future of the economy and, at the same time, innovation in 3-D printing makes most workers more productive, what is the combined effect on output, employment, and the price-level?
21. If Congress cuts taxes at the same time that businesses become more pessimistic about the economy, what is the combined effect on output, the price level, and employment using the AD/AS diagram?
22. How is long-term growth illustrated in an AD/AS model?
23. What are some of the ways in which exports and imports can affect the AD/AS model?
24. Review the problem in the Work It Out titled “Interpreting the AD/AS Model.” Like the information provided in that feature, table 8.2 shows information on aggregate supply, aggregate demand, and the price level for the imaginary country of Xurbia.

1. Plot the AD/AS diagram from the data. Identify the equilibrium.
2. Imagine that, as a result of a government tax cut, aggregate demand becomes higher by 50 at every price level. Identify the new equilibrium.
3. How will the new equilibrium alter output? How will it alter the price level? What do you think will happen to employment?

25.  The imaginary country of Harris Island has the aggregate supply and aggregate demand curves shown in Table 8.3.

1. Plot the AD/AS diagram. Identify the equilibrium.
2. Would you expect unemployment in this economy to be relatively high or low?
3. Would you expect concern about inflation in this economy to be relatively high or low?
4. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275 at every price level. Identify the new aggregate equilibrium.
5. How will the shift in AD affect the original output, price level, and employment?

26. The table below describes Santher’s economy.

1. Plot the AD/AS curves and identify the equilibrium.
2. Would you expect unemployment in this economy to be relatively high or low?
3. Would you expect prices to be a relatively large or small concern for this economy?
4. Imagine that input prices fall and so AS shifts to the right by 150 units. Identify the new equilibrium.
5. How will the shift in AS affect the original output, price level, and employment?