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Chapter 24: Q. 59 (page 604)
Suppose we extend the circular flow model to add imports and exports. Copy the circular flow diagram onto a
sheet of paper and then add a foreign country as a third agent. Draw a rough sketch of the flows of imports, exports,
and the payments for each on your diagram.
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Would a shift of AD to the right tend to make the equilibrium quantity and price level higher or lower? What about a shift of AD to the left?
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?
The imaginary country of Harris Island has the
aggregate supply and aggregate demand curves as Table shows.
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 at every price level.
Identify the new aggregate equilibrium.
e. How will the shift in AD affect the original
output, price level, and employment?
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?
What are some of the ways in which exports and imports can affect the AD/AS model?
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