Economics 347                                                                                    Worksheet #1

                                                                       

 

                                                                          

 

1. Draw the aggregate demand and supply model. Explain two reasons why the aggregate demand curve is sloped the way it is.

 

2. For each of the following factors, indicate whether they shift the aggregate supply curve or the aggregate demand curve of the United States, and whether the shift is towards the right or towards the left. Explain your answer.

 

a. The government increases the personal income tax rate.

 

b. A new computer program automatically reads your mind and prepares correspondence without you even having to sit down at the computer. This improves the efficiency of secretaries tremendously.

 

c. Assume that there is a successful strike in a major industry. Inspired by the success, workers in all industries demand higher wages.

 

d. The stock market declines to record low levels.

 

e. A severe recession hits Western Europe and Canada, our largest trading partner.

 

f. The "La Nina" weather system causes large scale drought conditions on the West Coast.

 

g. Congress manages passes legislation which provides tax cuts for firms that expand operations into poor, inner-city neighborhoods.

 

h. Because of increased pressure to fight crime, 30 out of the 50 states significantly increase their prison budgets.

 

 

3. Use the aggregate demand and supply graph to answer the following questions.

 

a. Assume for the moment that the economy is headed for a recession due to falling consumer confidence. Both graphically (using the AD-AS framework) and with words, show and explain the effects on output and the price level of a decrease in consumer confidence.

 

b. Now, since Alan Greenspan foresees this recession, he chooses to lower interest rates. Show and explain, both graphically (using the AD-AS framework) and with words, the effect of the lower interest rates on output and the price level in an economy in which consumer confidence is also declining.

 

 

Problem 4 (chapter tittled "What is Money?")

 

 

 4. For each of the following assets, indicate which monetary aggregate (M1, M2, both or none)

includes the asset. Explain you answer.

 

a. Savings account balances.

 

b. A dollar bill in your wallet.

 

c. A dollar bill in the bank's vault.

 

d. Stocks.

 

e. Checking account balances.

 

f. A check in your wallet written out for the amount of $2,000,000.

 

g. Traveler's checks.

 

h. Your visa card.

 

i. Your debit card.

 

j. Money market mutual fund balances.