Principles of Economics. Chapter 33. Exercises 6-10.

Principles of Economics. Chapter 33. Exercises 6-10. Aggregate Demand and Aggregate Supply. Gregory Mankiw. 8th edition.
6. For each of the three theories for the upward slope of the short-run aggregate-supply curve, carefully explain the following:
a. how the economy recovers from a recession and returns to its long-run equilibrium without any policy intervention
b. what determines the speed of that recovery
7. The economy begins in long-run equilibrium. Then one day, the president appoints a new chair of the Federal Reserve. This new chairman is well known for her view that inflation is not a major problem for an economy.
a. How would this news affect the price level that people would expect to prevail?
b. How would this change in the expected price level affect the nominal wage that workers and firms agree to in their new labor contracts?
c. How would this change in the nominal wage affect the profitability of producing goods and services at any given price level?
d. How does this change in profitability affect the short-run aggregate-supply curve?
e. If aggregate demand is held constant, how does this shift in the aggregate-supply curve affect the price level and the quantity of output produced?
f. Do you think this Fed chairman was a good appointment?
8. Explain whether each of the following events shifts the short-run aggregate-supply curve, the aggregate demand curve, both, or neither. For each event that does shift a curve, draw a diagram to illustrate the effect on the economy.
a. Households decide to save a larger share of their income
b. Florida orange groves suffer a prolonged period of below-freezing temperatures.
c. Increased job opportunities overseas cause many people to leave the country.
b. The federal government increases spending on national defense.
c. A technological improvement raises productivity.
d. A recession overseas causes foreigners to buy fewer U.S. goods.
10. Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment.
a. Draw an aggregate-demand/aggregate-supply diagram to show the short-run effect of this optimism on the economy. Label the new levels of prices and real output. Explain in words why the aggregate quantity of output supplied changes.
b. Now use the diagram from part (a) to show the new long-run equilibrium. of the economy. (For now, assume there is no change in the longrun aggregate-supply curve.) Explain in words why the aggregate quantity of output demanded changes between the short run and the long run.
c. How might the investment boom affect the long run aggregate-supply curve? Explain

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