10 The Aggregate Market
10.1 Preliminaries and data
Review Activities
Practice Problems
No practice problems for this section.
External Resources
No external resources for this section.
10.2 building a model of aggregate demand and aggregate supply
Review Activities
Practice Problems
Problem 10.2.1: Draw an aggregate market in a state of short-run equilibrium. Be sure to properly label everything. You do not need a LRAS curve.
Answers: See video.
External Resources
Khan Academy: Short-run Aggregate Supply
Khan Academy: Long-run Aggregate Supply
Khan Academy: Aggregate Demand
Khan Academy: Equilibrium in the Aggregate Market
10.3 shifts in aggregate demand
Review Activities
Practice Problems
Problem 10.3.1: An economy is initially in a state of long-run equilibrium. Then, consumers become optimistic about the future of the economy. The impact is expected to be temporary. Show the short-run impact on the aggregate market. How will price level, real GDP, and unemployment change? What is this situation called?
Answer: See video for graph. There will be an outward shift of the AD curve. This will cause an increase in price level, an increase in real GDP, and a decrease in unemployment. This is called an expansion.
Problem 10.3.2: An economy is initially in a state of long-run equilibrium. Then, the Federal Reserve increases the interest rate. The impact is expected to be temporary. Show the short-run impact on the aggregate market. How will price level, real GDP, and unemployment change? What is this situation called?
Answer: See video for graph. There will be an inward shift of the AD curve. This will cause a decrease in the price level, a decrease in real GDP, and an increase in unemployment. This is called a contraction or a recession.
External Resources
Khan Academy: Shifts in Aggregate Demand
10.4 shifts in aggregate supply
Review Activities
Practice Problems
Problem 10.4.1: For each of the following determine whether the event a) increases or decreases the b) aggregate demand only, short-run aggregate supply only, or both the short-run aggregate supply and long-run aggregate supply.
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A major drought temporarily reduces the amount of food produced in the United States.
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The government gives tax breaks to companies that choose to invest in new infrastructure in the United States.
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The interest rate increases.
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Labor unions become much more powerful thereby increasing the average wage rate.
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The government reduces taxes on income.
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The average American believes that their incomes will increase significantly over the next year.
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Resource prices increase rapidly.
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Austerity measures greatly reduce government spending for the next two years.
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The Federal Reserve decreases the interest rate.
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Artificial intelligence is widely used drastically increasing worker productivity.
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The average American is fearful of the future.
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The state of Pennsylvania sends a $600 tax rebate check to each tax payer.
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The federal government increases its spending on defense.
- A nuclear bomb is detonated causing 50% of a country’s farmland to become unusable for 500 years.
Answers: Decrease in SRAS; Increase in AD; Decrease in AD; Decrease in SRAS; Increase in AD; Increase in AD; Decrease in SRAS; Decrease in AD; Increase in AD; Increase in SRAS and LRAS; Decrease in AD; Increase in AD; Increase in AD; Decrease in SRAS and LRAS
Problem 10.4.2: An economy is initially in a state of long-run equilibrium. A new computer technology is invented which increases productivity by 15%. The impact is expected to be permanent. Show the short-run impact on the aggregate market. How will price level, real GDP, and unemployment change? What is this situation called?
Answer: See video for graph. There will be an outward shift of both the SRAS and LRAS. This causes price level to decrease, real GDP (including potential real GDP) to increase, and unemployment to decrease. This is called economic growth.
Problem 10.4.3: An economy is initially in a state of long-run equilibrium. A war has decreased agricultural output by 30%. The impact is expected to be temporary. Show the short-run impact on the aggregate market. How will price level, real GDP, and unemployment change? What is this situation called?
Answer: See video for graph. There will be an inward shift of the SRAS. This will cause an increase in price level, a decrease in real GDP, and an increase in unemployment. This situation is called stagflation.
External Resources
No external resources for this section.
10.5 the data of macroeconomics in the aggregate model
Review Activities
Practice Problems
There are no practice problems for this section.
External Resources
There are no external resources for this section.