1. Determine whether each of the following would cause a shift of the aggregate demand (AD) curve, a shift of the aggregate supply (AS) curve, neither or both. Which curve will shift, and in which direction? What will happen to aggregate output and the price level in each case?
2. The price level changes
3. Which curve will shift?

Neither the aggregate demand curve nor the aggregate supply curve will change.

1. Which direction does it shift?

No curve will shift in either direction.

• What will happen to aggregate output?

When the price level changes, the aggregate output will fluctuate until the price stabilizes. Overtime, the level of output will not be affected.

1. What will happen to the price level?

Since the price level is determined by the free market, it will fluctuate and converge in an    appropriate value. Overtime, the price level will not be affected.

1. Consumer confidence declines.
2. Which curve will shift?

The aggregate demand curve will shift

1. Which direction does it shift?

The aggregate demand curve will shift to the left.

• What will happen to aggregate output?

The aggregate output will decrease.

1. What will happen to the price level?

Decreasing aggregate demand will lower the price level.

 

1. The supply of resources increases.
2. Which curve will shift?

The aggregate supply curve will shift.

1. Which direction does it shift?

The aggregate supply curve will shift to the right.

• What happens to aggregate output?

The aggregate output will increase

1. What happens to the price level?

The price level will drop.

1. The wage rate increases.
2. Which will curve shift?

The aggregate demand curve will shift.

1. Which direction does it shift?

The aggregate demand curve will shift to the right.

• What will happen to aggregate output?

The aggregate output will increase.

1. What will happen to the price level?

The price level will increase.

2. Determine whether the following statements are true or false.
3. Some people who are officially unemployed are not in the labor force.

False, one is considered unemployed if he/she is actively looking for a job.

 

1. Some people in the labor force are not working.

True, they are unemployed.

• Everyone who is not unemployed is in the labor force.

False, labor force consists of unemployed and employed people (Hubbard, Garnett & Lewis, 2012).

1. Some people who are not working are not unemployed.

True, one is classified as unemployed when he/she is actively looking for a job; however, some decide not to work.

3. Refer to the following data on the U.S. consumer price index and answer the questions below.

 

Year    CPI                 Year    CPI                 Year    CPI                 Year    CPI

1988    118.3               1993    144.5               1998    163.0               2003    184.0

1989    124.0               1994    148.2               1999    166.6               2004    188.9

1990    130.7               1995    152.4               2000    172.2               2005    195.3

1991    136.2               1996    156.9               2001    177.1               2006    201.8

1992    140.3               1997    160.5               2002    179.9

 

 

1. Compute the inflation rate for each year 1988-1989, 1989-1990, 1990-1991, 1991-1992 etc. using the CPI data for 1988-2006 in the table above. Show your work.

Inflation rate = CPI2 – CPI1/CPI 1 ×100%

1988-1989 = 4.82%

1989-1990 = 5.40%

1990-1991 = 4.21%

1991-1992 = 3.01%

1992-1993 = 2.99%

1993-1994 = 2.56%

1994-1995 = 2.83%

1995-1996 = 2.95%

1996-1997 = 2.29%

1997-1998 = 1.56%

1998-1999= 2.21%

1999-2000= 3.36%

2000-2001= 2.85%

2001-2002= 1.58%

2002-2003= 2.28%

2003-2004= 2.66%

2004-2005= 3.39%

2005-2006= 3.33%

1. Which years were years of inflation? What do you expect to happen to real interest rates during this time period if nominal rates remain unchanged?

1990, 1995, 1996, 1999, 2003, 2004 and 2005

Real interest rates equal to nominal interest rates minus the inflation rates (Mankiw, 2012). Therefore, during this period, real interest rates will decrease.

1. In which years did deflation occur? What do you expect to happen to real interest rates during this time period if nominal rates remain unchanged

From the table, no years experienced deflation. Real interest rates would be unaffected because no year has experienced inflation below 0%.

1. In which years did disinflation occur

1991, 1992, 1993, 1994, 1997, 1997, 1998, 2001, 2002, 2006

4. What are the costs associated with unanticipated inflation? Why do these inflation costs differ from those associated with anticipated inflation?

Unanticipated inflation refers to the inflation that occurs without the knowledge of the people until after the price level increases. According to Maheshwari (2008), the costs associated with unanticipated inflation include redistribution of wealth from lenders to borrowers. Lenders will be losing more money. The other cost includes redistribution of income. Costs differ because with anticipated inflation; people will prepare for inflation and protect themselves. For instance, banks can adjust interest rates while businesses can adjust prices.

 

References

Hubbard, G., Garnett, A., & Lewis, P. (2012). Essentials of economics. Pearson Higher Education AU.

Maheshwari, Y. (2008). Investment management. New Delhi: PHI Learning Private Limited.

Mankiw, N. G. (2012). Principles of macroeconomics. Mason, OH: South-Western Cengage Learning.

 

 

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