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© 2013 Pearson
Aggregate Supply and
Aggregate Demand
29
CHECKPOINTS
© 2013 Pearson
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Checkpoint 29.1
Problem 1
In the news
Clicker
version
Checkpoint 29.2
Problem 1
Clicker
version
Checkpoint 29.3
Problem 1
Problem 2
Problem 2
Clicker
version
In the news
Problem 3
Clicker
version
In the news
© 2013 Pearson
CHECKPOINT 29.1
Practice Problem 1
Explain the influence of each of events on the quantity of
real GDP supplied and aggregate supply in India and use
a graph to illustrate.
• Fuel prices rise.
• U.S. firms move their IT and data functions to India.
• Wal-Mart and Starbucks open in India.
• Universities in India increase the number of
engineering graduates.
• The money wage rate in India rises.
• The price level in India rises.
© 2013 Pearson
CHECKPOINT 29.1
Solution
As fuel prices rise, the quantity
of real GDP supplied at the
current price level decreases.
The AS curve shifts leftward.
© 2013 Pearson
CHECKPOINT 29.1
As businesses move their IT
and data functions to India, real
GDP supplied at the current
price level increases.
The AS curve shifts rightward.
© 2013 Pearson
CHECKPOINT 29.1
As Wal-Mart and Starbucks
open in India, the quantity of
real GDP supplied at the
current price level increases.
The AS curve shifts rightward.
© 2013 Pearson
CHECKPOINT 29.1
With more engineering
graduates, the number of
skilled workers increases, and
production increases at the
current price level.
The AS curve shifts rightward.
© 2013 Pearson
CHECKPOINT 29.1
As money wage rates rises,
firms’ costs increase and the
quantity of real GDP supplied
at the current price level
decreases.
The AS curve shifts leftward.
© 2013 Pearson
CHECKPOINT 29.1
As the price level increases,
other things remaining the
same, businesses become
more profitable.
As the price level increases,
firms increase the quantity of
real GDP supplied along the
AS curve.
The AS curve does not shift.
© 2013 Pearson
CHECKPOINT 29.1
Study Plan Problem
U.S. firms move their IT and data functions to India.
In the short run, India’s aggregate supply _________.
A. increases
B. doesn’t change, but U.S. aggregate supply increases
C. decreases because more of India’s workers are now
employed by U.S. firms
D. doesn’t change, but a higher price level brings an
increase in the quantity of real GDP supplied
© 2013 Pearson
CHECKPOINT 29.1
Fuel prices rise in India. In the short run, India’s
aggregate supply _________.
A. increases
B. doesn’t change, the quantity of real GDP supplied
decreases
C. doesn’t change, but the quantity of real GDP supplied
increases
D. decreases
© 2013 Pearson
CHECKPOINT 29.1
Wal-Mart and Starbucks open in India. In the short
run, India’s aggregate supply _______.
A. increases
B. doesn’t change, the quantity of real GDP supplied
decreases
C. doesn’t change, but the quantity of real GDP supplied
increases
D. decreases
© 2013 Pearson
CHECKPOINT 29.1
Universities in India increase the number of
engineering graduates. In the short run, India’s
aggregate supply _______.
A. doesn’t change, the quantity of real GDP supplied
decreases
B. increases
C. doesn’t change, but the quantity of real GDP supplied
increases
D. decreases
© 2013 Pearson
CHECKPOINT 29.1
The money wage rate in India rises. In the short run,
India’s aggregate supply _______.
A. doesn’t change, but the price level rises and the
quantity of real GDP supplied increases
B. increases
C. doesn’t change, but the price level falls and the
quantity of real GDP supplied decreases
D. decreases
© 2013 Pearson
CHECKPOINT 29.1
The price level in India rises. In the short run, India’s
aggregate supply _______.
A. doesn’t change, but the quantity of real GDP supplied
decreases
B. increases
C. doesn’t change, but the quantity of real GDP supplied
increases
D. decreases
© 2013 Pearson
CHECKPOINT 29.1
In the news
Minimum wage to rise in eight states
Colorado, Montana, Ohio, Washington, and Oregon
recently announced their 2012 minimum wages, which
contain rises ranging from 28 cents to 37 cents per hour.
Thus translates into annual raises of between$582 and
$770 for full-time workers.
Source: CNN Money, October 3, 2011
Explain how the rise in the minimum wage will influence
aggregate supply.
© 2013 Pearson
CHECKPOINT 29.1
Solution
The rise in the minimum wage at the current price level
increases the real wage rate and decreases aggregate
supply.
If the rise in the minimum wage rate increases the natural
unemployment rate, potential GDP decreases and
aggregate supply decreases farther.
© 2013 Pearson
CHECKPOINT 29.2
Practice Problem 1
Mexico trades with the United States.
Explain the effect of each of the following events on
Mexico’s aggregate demand.
• The government of Mexico cuts income taxes.
• The United States experiences strong economic
growth.
• Mexico sets new environmental standards that
require factories to upgrade their production facilities.
© 2013 Pearson
CHECKPOINT 29.2
Solution
A tax cut increases disposable
income, which increases
Mexico’s aggregate demand.
The AD curve shifts rightward.
© 2013 Pearson
CHECKPOINT 29.2
Strong U.S. growth increases
the demand for Mexicanproduced goods and increases
Mexico’s aggregate demand.
The AD curve shifts rightward.
© 2013 Pearson
CHECKPOINT 29.2
As factories upgrade their
facilities, investment increases.
Aggregate demand increases.
The AD curve shifts rightward.
© 2013 Pearson
CHECKPOINT 29.2
Study Plan Problem
If the government of Mexico cuts income
taxes,Mexico’s aggregate demand _________.
A. decreases, and the AD curve shifts leftward
B. increases, and the AD curve shifts rightward
C. is unchanged because it just increases the amount that
taxpayers transfer to the government
D. is unchanged, but the price level rises and the quantity
of real GDP demanded decreases
© 2013 Pearson
CHECKPOINT 29.2
Mexico trades with the United States. If the United
States experiences strong economic growth, Mexico’s
aggregate demand _________.
A. decreases and the AD curve shifts leftward
B. is unchanged, but the quantity of real GDP demanded
increases
C. is unchanged, but U.S. aggregate demand increases
D. increases because its exports to the United States
increases
© 2013 Pearson
CHECKPOINT 29.2
When Mexico sets new environmental standards that
require factories to upgrade their production facilities.
Mexico’s aggregate demand _________.
A. increases because investment increases
B. is unchanged, but the quantity of real GDP demanded
increases
C. is unchanged, but the quantity of real GDP demanded
decreases
D. decreases
© 2013 Pearson
CHECKPOINT 29.2
Practice Problem 2
Explain the effect of each of the following events on
Mexico’s aggregate demand.
• Europe trades with Mexico and Europe goes into
recession.
• The price level in Mexico rises.
• Mexico increases the quantity of money.
© 2013 Pearson
CHECKPOINT 29.2
Solution
A recession in Europe
decreases European demand
for Mexican goods.
Mexico’s exports decrease.
Aggregate demand decreases
and the AD curve shifts
leftward.
© 2013 Pearson
CHECKPOINT 29.2
A rise in the price level
decreases the quantity of
real GDP demanded
along the AD curve, but
the AD curve does not
shift.
© 2013 Pearson
CHECKPOINT 29.2
An increase in the quantity of
money increases aggregate
demand, and the AD curve
shifts rightward.
© 2013 Pearson
CHECKPOINT 29.2
In the news
Durable goods orders fall, new-homes sales pick up
The BEA announced that demand for durable goods fell
5.3%, while new-home sales rose 4.2% in the second
quarter of 2011. U.S. exports increased 3.6%.
Source: BEA, September 29, 2011
Explain how the items in the news clip influence U.S.
aggregate demand.
© 2013 Pearson
CHECKPOINT 29.2
Solution
The purchase of durable goods and new homes is
investment.
A decrease in durable goods sales decreases aggregate
demand, while the increase in new home sales increased
aggregate demand.
The rise in U.S. exports is an increase in the demand for
U.S.-produced goods and services, so the rise in U.S.
exports increased U.S. aggregate demand.
© 2013 Pearson
CHECKPOINT 29.3
Practice Problem 1
The U.S. economy is at full employment when the following
events occur:
• A deep recession hits the world economy.
• The world oil price rises by a large amount.
• U.S. businesses expect future profits to fall.
Explain the effect of each event separately on aggregate
demand and aggregate supply.
How will real GDP and price level change in the short run?
© 2013 Pearson
CHECKPOINT 29.3
Solution
A deep recession in the
world economy decreases
U.S. aggregate demand.
The AD curve shifts leftward.
In the short run, U.S. real
GDP decreases and the
price level falls.
© 2013 Pearson
CHECKPOINT 29.3
A rise in the world oil price
decreases U.S. aggregate
supply.
The AS curve shifts leftward.
In the short run, U.S. real GDP
decreases and the price level
rises.
© 2013 Pearson
CHECKPOINT 29.3
A fall in expected future profits
decreases U.S. aggregate
demand.
The AD curve shifts leftward.
In the short run, U.S. real GDP
decreases and the price level
falls.
© 2013 Pearson
CHECKPOINT 29.3
Practice Problem 2
The U.S. economy is at full employment when the following
events occur:
• A deep recession hits the world economy.
• The world oil price rises by a large amount.
• U.S. businesses expect future profits to fall.
Explain the combined effect of these events on real GDP
and price level.
© 2013 Pearson
CHECKPOINT 29.3
Solution
All three events decrease U.S. real GDP.
The deep world recession and the fall in expected future
profits decrease the price level.
The rise in the world oil price increases the price level.
So the combined effect on the price level is ambiguous.
© 2013 Pearson
CHECKPOINT 29.2
Study Plan Problem
The U.S. economy is at full employment when a deep
recession hits the world economy, the world oil price
rises by a large amount, and U.S. businesses expect
future profits to fall.
A. The U.S. price level rises and real GDP decreases
B. The U.S. price level falls and real GDP decreases
C. U.S. real GDP decreases, but the price level might rise or
fall.
D. U.S. real GDP increases, but the price level might rise or
fall.
© 2013 Pearson
CHECKPOINT 29.3
Practice Problem 3
The U.S. economy is at full employment when the following
events occur:
• A deep recession hits the world economy.
• The world oil price rises by a large amount.
• U.S. businesses expect future profits to fall.
Which event, if any, brings stagflation?
© 2013 Pearson
CHECKPOINT 29.3
Solution
Stagflation occurs when the
price level rises and real GDP
decreases at the same time.
The rise in the world oil price
brings stagflation because it
decreases aggregate supply,
decreases real GDP, and
raises the price level.
© 2013 Pearson
CHECKPOINT 29.2
Study Plan Problem
The U.S. economy is at full employment. Stagflation
occurs, if ______.
A. a deep recession hits the world economy
B. the world oil price rises by a large amount
C. U.S. businesses expect future profits to fall.
D. A, or B, or C occur.
© 2013 Pearson
CHECKPOINT 29.3
In the news
U.S. incomes fall for the first time in 2 years
Consumer spending rose 0.2 percent, down from 0.7
percent in July. Incomes fell 0.1 percent—the first decline
since October 2009. Consumer spending accounts for 70
percent of economic activity.
Source: Associated Press, September 30, 2011
Explain the combined effect of these events in terms of the
AS-AD model.
© 2013 Pearson
CHECKPOINT 29.3
Solution
The news clip gives no information about aggregate
supply.
Consumption expenditure is 70 percent of aggregate
demand, so an increase in consumption expenditure
would increase aggregate demand, GDP, and aggregate
incomes.
© 2013 Pearson
CHECKPOINT 29.3
But incomes fell, so the other components of aggregate
demand (investment, government expenditure, net
exports) must have decreased, ….
moving the economy down along the AS curve.
Or aggregate supply must have decreased, moving the
economy up along the AD curve.
© 2013 Pearson