right in the following year? By how much, if any, has the aggregate demand curve shifted to the right? (Hint: The equilibrium price level can stay the same only if LRAS and AD shift rightward by the same amount.) (See page 232.) 10-4. Suppose that the position of a nation’s long-run aggregate supply curve has not changed, but its long-run equilibrium price level has increased. Which of the following factors might account for this event? (See page 232.) a. A rise in the value of the domestic currency relative to other world currencies b. An increase in the quantity of money in circulation c. An increase in the labor force participation rate d. A decrease in taxes e. A rise in real incomes of countries that are key trading partners of this nation f. Increased long-run economic growthAll problems are assignable inMyEconLab. Answers to odd-numbered problems appear inMyEconLab. 10-1. Many economists view the natural rate of unem-ployment as the level observed when real GDP is given by the position of the long-run aggregate supply curve. How can there be positive unem-ployment in this situation? (See page 223.) 10-2. Suppose that the long-run aggregate supply curve is positioned at a real GDP level of $18 trillion in base-year dollars, and the long-run equilibrium price level (in index number form) is 115. What is the full-employment level of nominal GDP? (See page 231.) 10-3. Continuing from Problem 10-2, suppose that the full-employment level of nominal GDP in the fol-lowing year rises to $21.85 trillion. The long-run equilibrium price level, however, remains unchanged. By how much (in real dollars) has the long-run aggregate supply curve shifted to the
10-5. Identify the combined shifts in long-run aggregate supply and aggregate demand that could explain the following simultaneous occurrences. (See page 232.) a. An increase in equilibrium real GDP and an increase in the equilibrium price level b. A decrease in equilibrium real GDP with no change in the equilibrium price level c. An increase in equilibrium real GDP with no change in the equilibrium price level d. A decrease in equilibrium real GDP and a decrease in the equilibrium price level 10-6. Suppose that during the past 3 years, equilibrium real GDP in a country rose steadily, from $450 billion to $500 billion, but even though the posi-tion of its aggregate demand curve remained unchanged, its equilibrium price level steadily declined, from 110 to 103. What could have accounted for these outcomes, and what is the term for the change in the price level experienced by this country? (See page 232.) 10-7. Suppose that during a given year, the quantity of U.S. real GDP that can be produced in the long run rises from $17.9 trillion to $18.0 trillion, measured in base-year dollars. During the year, no change occurs in the various factors that influence aggregate demand. What will happen to the U.S. long-run equilibrium price level during this par-ticular year? (See page 232.) 10-8. Assume that the position of a nation’s aggregate demand curve has not changed, but the long-run equilibrium price level has declined. Other things being equal, which of the following factors might account for this event? (See page 232.) a. An increase in labor productivity b. A decrease in the capital stock c. A decrease in the quantity of money in circulation d. The discovery of new mineral resources used to produce various goods e. A technological improvement 10-9. Suppose that there is a sudden rise in the price level. What will happen to economywide planned spending on purchases of goods and services? Why? (See pages 227–228.) 10-10. Assume that the economy is in long-run equilib-rium with complete information and that input prices adjust rapidly to changes in the prices of goods and services. If there is a rise in the price level induced by an increase in aggregate demand, what happens to real GDP? (See page 232.) 10-11. Consider the diagram below when answering the questions that follow. (See page 231.) a. Suppose that the current price level is P2. Explain why the price level will decline toward P1. b. Suppose that the current price level is P3. Explain why the price level will rise toward P1.LRASPrice LevelP1P2P3Real GDP per Year (base-year dollars)ADMyEconLab Visit http://www.myeconlab.com to complete these exercises online and get instant feedback. 10-12. Explain whether each of the following events would cause a movement along or a shift in the position of the LRAS curve, other things being equal. In each case, explain the direction of the movement along the curve or shift in its position. (See page 224.) a. Last year, businesses invested in new capital equipment, so this year the nation’s capital stock is higher than it was last year. b. There has been an 8 percent increase in the quantity of money in circulation that has shifted the AD curve. c. A hurricane of unprecedented strength has damaged oil rigs, factories, and ports all along the nation’s coast. d. Inflation has occurred during the past year as a result of rightward shifts of the AD curve. 10-13. Explain whether each of the following events would cause a movement along or a shift in the AD curve, other things being equal. In each case, explain the direction of the movement along the curve or shift in its position. (See pages 227–229.) a. Deflation has occurred during the past year. b. Real GDP levels of all the nation’s major trading partners have declined. c. There has been a decline in the foreign exchange value of the nation’s currency. d. The price level has increased this year. 10-14. This year, a nation’s long-run equilibrium real GDP and price level both increased. Which of the follow-ing combinations of factors might simultaneously account for both occurrences? (See page 232.) a. An isolated earthquake at the beginning of the year destroyed part of the nation’s capital stock, and the nation’s government significantly reduced its purchases of goods and services. b. There was a technological improvement at the end of the previous year, and the quantity of money in circulation rose significantly during the year. c. Labor productivity increased throughout the year, and consumers significantly increased their total planned purchases of goods and services. d. The capital stock increased somewhat during the year, and the quantity of money in circula-tion declined considerably. 10-15. Explain how, if at all, each of the following events would affect equilibrium real GDP and the long-run equilibrium price level. (See page 232.) a. A reduction in the quantity of money in circu-lation b. An income tax rebate (the return of previously paid taxes) from the government to house-holds, which they can apply only to purchases of goods and services c. A technological improvement d. A decrease in the value of the home currency in terms of the currencies of other nations 10-16. For each question, suppose that the economy begins at the long-run equilibrium point A in the diagram below. Identify which of the other points on the diagram—points B, C, D, or E—could represent a new long-run equilibrium after the described events take place and move the economy away from point A. (See page 232.) a. Significant productivity improvements occur, and the quantity of money in circulation increases. b. No new capital investment takes place, and a fraction of the existing capital stock depreciates and becomes unusable. At the same time, the government imposes a large tax increase on the nation’s households. c. More efficient techniques for producing goods and services are adopted throughout the economy at the same time that the government reduces its spending on goods and services.AD1AD3AD2ABCDELRAS1LRAS2LRAS3Price Level120Real GDP($ trillions per year)017181930210MyEconLab Visit http://www.myeconlab.com to complete these exercises online and get instant feedback.REFERENCESPhillip Inman and Helena Smith, “Greek Economy to Shrink 25 Percent by 2014,” The Guardian, September 18, 2013.Cyrus Sanati, “Greece’s Economy Is Still a Huge Mess,” CNN Money, April 11, 2014.POLICY EXAMPLE: Oscillating Amounts of Money in Circulation Cause Aggregate Demand to GyrateINTERNATIONAL EXAMPLE: Greece Experiences a Series of Leftward Shifts in Its LRAS Curve“Greek GDP Shrinks More Than Expected in the First Quarter,” FocusEconomics, June 12, 2013. (www .focus-economics.com/en/economy/news/Greece-GDP-GDP_shrinks_more_than_expected_in_the_first_quarter-2013-06-12) 10-17. In Ciudad Barrios, El Salvador, the latest payments from relatives working in the United States have finally arrived. When the credit unions open for business, up to 150 people are already waiting in line. After receiving the funds their relatives have transmitted to these institutions, customers go off to outdoor markets to stock up on food or clothing or to appliance stores to purchase new stereos or televisions. Similar scenes occur throughout the developing world, as each year migrants working in higher-income, developed nations send around $200 billion of their earnings back to their rela-tives in less developed nations. Evidence indicates that the relatives, such as those in Ciudad Barrios, typically spend nearly all of the funds on current consumption. (See page 232.) a. Based on the information supplied, are develop-ing countries’ income inflows transmitted by migrant workers primarily affecting their econ-omies’ long-run aggregate supply curves or aggregate demand curves? b. How are equilibrium price levels in nations that are recipients of large inflows of funds from migrants likely to be affected? Explain your rea-soning.