Critical Thinking Questions

21 . What is the economic reason why the SRAS curve slopes up? 22 . What are the components of the aggregate demand (AD) curve? 23 . What are the economic reasons why the AD curve slopes down? 24 . Briefly explain the reason for the near-horizontal shape of the SRAS curve on its far left. 25 . Briefly explain the reason for the near-vertical shape of the SRAS curve on its far right. 26 . What is potential GDP? 27 . 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. 28 . 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? 29 . What is stagflation? 30 . Name some factors that could cause AD to shift, and say whether they would shift AD to the right or to the left. 31 . Would a shift of AD to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of AD to the left? 32 . How is long-term growth illustrated in an AD/AS model? 33 . How is recession illustrated in an AD/AS model? 34 . How is cyclical unemployment illustrated in an AD/AS model? 35 . How is the natural rate of unemployment illustrated in an AD/AS model? 36 . How is pressure for inflationary price increases shown in an AD/AS model? 37 . What are some of the ways in which exports and imports can affect the AD/AS model? 38 . What is the Keynesian zone of the SRAS curve? How much is the price level likely to change in the Keynesian zone? 39 . What is the neoclassical zone of the SRAS curve? How much is the output level likely to change in the neoclassical zone? 40 . 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?

Critical Thinking Questions

41 . Why would an economist choose either the neoclassical perspective or the Keynesian perspective, but not both? 42 . On a microeconomic demand curve, a decrease in price causes an increase in quantity demanded because the product in question is now relatively less expensive than substitute products. Explain why aggregate demand does not increase for the same reason in response to a decrease in the aggregate price level. In other words, what causes total spending to increase if it is not because goods are now cheaper? 43 . Economists expect that as the labor market continues to tighten going into the latter part of 2015 that workers should begin to expect wage increases in 2015 and 2016. Assuming this occurs and it was the only development in the labor market that year, how would this affect the AS curve? What if it was also accompanied by an increase in worker productivity? 44 . 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? 45 . 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? 46 . 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? 47 . Some politicians have suggested tying the minimum wage to the consumer price index (CPI). Using the AD/AS diagram, what effects would this policy most likely have on output, the price level, and employment? 48 . If households decide to save a larger portion of their income, what effect would this have on the output, employment, and price level in the short run? What about the long run? 49 . 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? 50 . 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? 51 . Suppose the level of structural unemployment increases. How would you illustrate the increase in structural unemployment in the AD/AS model? Hint: How does structural unemployment affect potential GDP? 52 . If foreign wealth-holders decide that the United States is the safest place to invest their savings, what would the effect be on the economy here? Show graphically using the AD/AS model. 53 . The AD/AS model is static. It shows a snapshot of the economy at a given point in time. Both economic growth and inflation are dynamic phenomena. Suppose economic growth is 3% per year and aggregate demand is growing at the same rate. What does the AD/AS model say the inflation rate should be? 54 . 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? 55 . 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? 56 . Why might it be important for policymakers to know which in zone of the SRAS curve the economy is? 57 . In your view, is the economy currently operating in the Keynesian, intermediate or neoclassical portion of the economy’s aggregate supply curve? 58 . Are Say’s law and Keynes’ law necessarily mutually exclusive?

Problems

59 . Review the problem in the Work It Out titled "Interpreting the AD/AS Model." Like the information provided in that feature, Table 11.2 shows information on aggregate supply, aggregate demand, and the price level for the imaginary country of Xurbia.