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Chapter 12: Q8. (page 258)

In early 2001 investment spending sharply declined in the United States. In the 2 months following the September 11, 2001 attacks on the United States, consumption also declined. Use AD-AS analysis to show the two impacts on real GDP.

Short Answer

Expert verified

The two impacts on real GDP using AD-AS analysis is shown below:

Step by step solution

01

Explanation

As the investment spending declines sharply in the United States, the AD curve will shift downward, as investment spending is a component of the AD curve. After the attacks on the United States, the consumption fell; thus, the AD curve again fell and shifted leftward. The two impacts will lead to a decrease in real output and a fall in the price level.

Initially, with the fall in investment spending, the AD curve falls from AD1 to AD2; after the fall in consumption, the AD curve falls further from AD2 to AD3. The price level falls from P1 to P3, and quantity falls from Q1 to Q3.

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Most popular questions from this chapter

At the current price level, producers supply \(375 billion of final goods and services while consumers purchase \)355 billion of final goods and services. The price level is:

  1. above equilibrium.
  2. at equilibrium.
  3. below equilibrium.
  4. more information is needed.

Explain: 鈥淯nemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply.鈥� In each case, specify the price-level outcomes.

Which of the following will shift the aggregate demand curve to the left?

  1. The government reduces personal income taxes.

  2. Interest rates rise.

  3. The government raises corporate profit taxes.

  4. There is an economic boom overseas that raises the incomes of foreign households.

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? In each case, use a diagram to show the expected effects on the equilibrium price level and the level of real output, assuming that the price level is flexible both upward and downward.

  1. A widespread fear by consumers of an impending economic depression.

  2. A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output.

  3. A reduction in interest rates.

  4. A major increase in spending for health care by the federal government.

  5. The general expectation of coming rapid inflation.

  6. The complete disintegration of OPEC, causing oil prices to fall by one-half.

  7. A 10 percent across-the-board reduction in personal income tax rates.

  8. A sizable increase in labor productivity (with no change in nominal wages).

  9. A 12 percent increase in nominal wages (with no change in productivity).

  10. An increase in exports that exceeds an increase in imports (not due to tariffs).

Explain how an upsloping aggregate supply curve weakens the realized multiplier effect from an initial change in investment spending.
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