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Chapter 11: Q. 5 (page 291)

Suppose the U.S. Congress passes significant immigration reform that makes it more difficult for foreigners to come to the United States to work. Use the AD/AS model to explain how this would affect the equilibrium level of GDP and the price level.

Short Answer

Expert verified

As described, immigration reform should increase labour supply, move SRAS to the right, and result in a higher equilibrium GDP and lower price level.

Step by step solution

01

concept introduction

The total quantity of products and services sought by consumers at a given price level and period is known as aggregate demand.

The value of total production produced by an economy at a certain price level over a specific time period is known as aggregate supply.

02

Explanation

As it gets more difficult for foreigners to find job in the United States, the following effects will occur. The effect on the AS/AD model.

Shift of AD curve to its left.

Shift of AS curve to its left.

Because there would be lots of immigrants, the aggregate demand curve will decrease, resulting in a drop in consumption, which is a major component of AD. A decrease in consumption would cause the AD curve to shift to the left. The effect on the AS curve. Immigrants come to the United States to work, so any restrictions on their entry would result in reduced production, pushing the AS curve to the left. Immigrants would make little contribution, resulting in lower output.

The above effects would result in a fall in the equilibrium level of output, while prices would likely remain stable.

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Most popular questions from this chapter

The short run aggregate supply curve was constructed assuming that as the price of outputs increases, the price of inputs stays the same. How would an increase in the prices of important inputs, like energy, affect aggregate supply?

Suppose the Federal Reserve begins to increase the supply of money at an increasing rate. What impact would that have on GDP, unemployment, and inflation?

Review the problem in the Work It Out titled "Interpreting the AD/AS Model." Like the information provided in that feature, Table 11.2 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

a. Plot the AD/AS diagram from the data. Identify the equilibrium.

b. Imagine that, as a result of a government tax cut, aggregate demand becomes higher by 50 at every price level. Identify the new equilibrium.

c. How will the new equilibrium alter output? How will it alter the price level? What do you think will happen to employment?

Why would an economist choose either the neoclassical perspective or the Keynesian perspective, but not both?

The imaginary country of Harris Island has the aggregate supply and aggregate demand curves as Table 11.3 shows.

Price Level
AD
AS
100
700
200
120
600
325
140
500
500
160
400
570
180
300
620

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 275 at every price level. Identify the new aggregate equilibrium.

e. How will the shift in AD affect the original output, price level, and employment?
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