Building a Model of Aggregate Demand and Aggregate Supply

Problems

Review the problem in the Work It Out titled "Interpreting the AD/AS Model." Like the information provided in that feature, Table 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
Price Level: AD/AS
  1. Plot the AD/AS diagram from the data. Identify the equilibrium.
  2. Imagine that, as a result of a government tax cut, aggregate demand becomes higher by 50 at every price level. Identify the new equilibrium.
  3. How will the new equilibrium alter output? How will it alter the price level? What do you think will happen to employment?

The imaginary country of Harris Island has the aggregate supply and aggregate demand curves as Table shows.

Price Level AD AS
100 700 200
120 600 325
140 500 500
160 400 570
180 300 620
Price Level: AD/AS
  1. Plot the AD/AS diagram. Identify the equilibrium.
  2. Would you expect unemployment in this economy to be relatively high or low?
  3. Would you expect concern about inflation in this economy to be relatively high or low?
  4. 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.
  5. How will the shift in AD affect the original output, price level, and employment?

Table describes Santher's economy.

Price Level AD AS
50 1,000 250
60 950 580
70 900 750
80 850 850
90 800 900
Price Level: AD/AS
  1. Plot the AD/AS curves and identify the equilibrium.
  2. Would you expect unemployment in this economy to be relatively high or low?
  3. Would you expect prices to be a relatively large or small concern for this economy?
  4. Imagine that input prices fall and so AS shifts to the right by 150 units. Identify the new equilibrium.
  5. How will the shift in AS affect the original output, price level, and employment?