Problems

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. Price Level AD AS 110 700 600 120 690 640 130 680 680 140 670 720 150 660 740 160 650 760 170 640 770 TABLE 11.2Price Level: AD/AS a. Plot the AD/AS diagram from the data. Identify the equilibrium. b. Imagine that, as a result of a government tax cut, aggregate demand becomes higher by 50 at every price level. Identify the new equilibrium. c. How will the new equilibrium alter output? How will it alter the price level? What do you think will happen to employment? 60 . The imaginary country of Harris Island has the aggregate supply and aggregate demand curves as Table 11.3 shows. Price Level AD AS 100 700 200 120 600 325 140 500 500 160 400 570 180 300 620 TABLE 11.3Price Level: AD/AS a. Plot the AD/AS diagram. Identify the equilibrium. b. Would you expect unemployment in this economy to be relatively high or low? c. Would you expect concern about inflation in this economy to be relatively high or low? d. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275 at every price level. Identify the new aggregate equilibrium. e. How will the shift in AD affect the original output, price level, and employment? 61 . Table 11.4 describes Santher's economy. Price Level AD AS 50 1,000 250 60 950 580 70 900 750 80 850 850 90 800 900 TABLE 11.4Price Level: AD/AS a. Plot the AD/AS curves and identify the equilibrium. b. Would you expect unemployment in this economy to be relatively high or low? c. Would you expect prices to be a relatively large or small concern for this economy? d. Imagine that input prices fall and so AS shifts to the right by 150 units. Identify the new equilibrium. e. How will the shift in AS affect the original output, price level, and employment?

FIGURE 12.1Signs of a RecessionHome foreclosures were just one of the many signs and symptoms of the recent Great Recession. During that time, many businesses closed and many people lost their jobs. (Credit: modification of "Foreclosure" by Taber Andrew Bain/Flickr Creative Commons, CC BY 2.0)

In this chapter, you will learn about:

• Aggregate Demand in Keynesian Analysis
• The Building Blocks of Keynesian Analysis
• The Phillips Curve
• The Keynesian Perspective on Market Forces

BRING IT HOME The Great Recession The 2008–2009 Great Recession hit the U.S. economy hard. According to the Bureau of Labor Statistics (BLS), the number of unemployed Americans rose from 6.8 million in May 2007 to 15.4 million in October 2009. During that time, the U.S. Census Bureau estimated that approximately 170,000 small businesses closed. Mass layoffs peaked in February 2009 when employers gave 326,392 workers notice. U.S. productivity and output fell as well. Job losses, declining home values, declining incomes, and uncertainty about the future caused consumption expenditures to decrease. According to the BLS, household spending dropped by 7.8%. Home foreclosures and the meltdown in U.S. financial markets called for immediate action by Congress, the President, and the Federal Reserve Bank. For example, the government implemented programs such as the American Restoration and Recovery Act to help millions of people by providing tax credits for homebuyers, paying