ANSWERS, SOLUTIONS, AND EXERCISES
PROBLEM SET
1.
Initially, all three graphs depict equilibrium at point E. A lower price level reduces
money demand (shown by the shift from Md1 to Md2 in the upper left-hand panel),
lowers the interest rate, increases interest-sensitive spending, and raises aggregate
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2.
Initially, the economy is in equilibrium at points E, J, and S. A decrease in the money
supply is illustrated as a shift of the money supply from MS1 to MS2; the interest rate
rises. The higher interest rate causes aggregate expenditure to decrease, leading to a
Chapter 27 Aggregate Demand and Aggregate Supply 290
3.
Assume that the economy is initially in equilibrium at point E. A decline in investment
spending will shift the AD curve leftward, leading to a lower price level and smaller
4.
Initially, the economy is at point E. If the money supply decreases, the interest rate
begins to rise, and the aggregate expenditure line shifts downward. Real GDP at any
price level declines, indicated by a leftward shift of the AD curve to AD2. In the short
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5.
The increase in autonomous consumption shifts the aggregate demand curve rightward
from AD1 to AD2, increasing both the price level and real GDP in the short run (from
point A to point B). In the absence of government intervention, the aggregate supply
6. In the short run, unit costs decrease and the AS curve shifts downward. The price level
falls, and real GDP rises, above full-employment GDP. If the policy is temporary, then
—in the long run—the AS curve will return to its original position once the policy is
no longer in force. But even if the policy is in force for an extended period of time, the
Chapter 27 Aggregate Demand and Aggregate Supply 292
7. a.
If the Fed did nothing, the AS curve would eventually have shifted back to its
b.
The Fed’s actions were designed to boost investment spending, which shifted the AD
c. If the Fed did nothing then the price level would have fallen as the AS curve
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9. a.
b.
After the initial increase in competition shifts the AS curve downward from
Chapter 27 Aggregate Demand and Aggregate Supply 294
10. a.
A temporary decrease in nonlabor input prices would temporarily move the
b. If the decrease lasts for an extended period, the self-correcting mechanism will
c. The Fed would reduce the money supply to move the economy away from point
MORE CHALLENGING
11.
If wages adjusted rapidly upward, but very slowly downward, the short-run AS curve
would have a kink at the current level of output, as shown in the diagram. Upward
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12. The Fed countered the downward AS curve shift by increasing the money supply,
EXPERIENTIAL EXERCISE
Net exports are an important influence on aggregate demand. Find a story in today’s Wall
Street Journal that describes an event that will affect U.S. imports or exports. A good place to