1. The economy of Hopeland has the following aggregate demand and supply schedules:

Price Level     Real GDP demanded     Real GDP supplied (Short-run)         ($ trillion)             ($ trillion)

90                         4.5                         3.5

100                      4.0                         4.0

110                      3.5                         4.5

120                      3.0                         5.0

130                      2.5                         5.5

140                      2.0                         6.0

 1.1 What are the values of real GDP and the price level in a short-run macroeconomic equilibrium?

1.2 If the potential GDP of Hopeland is $4.2 trillion, will there be a recessionary or inflationary gap? By how much? Is Hopeland at, above or below its natural rate of unemployment?

1.3 What is your forecast of the inflation rate for next year?

1.4 If aggregate demand is increased by $1 trillion, what are the changes in real GDP and the price level in the short run and long run?

2. An economy has the following information:

Disposable Income         Consumption expenditure                                ($ million per year)         ($ million per year)

            0                                     50

            100                               100

            200                               150

            300                               200

            400                               250

2.1 Calculate the marginal propensity to consume.

2.2 If the gross investment expenditure is $50 million, government purchases of goods and services are $60 million, net taxes are $20 million, and net exports is zero, what is the equilibrium expenditure?

2.3 If investment falls to $45 million, what is the change in equilibrium national income? What is the size of the multiplier?

3. What are the effects of each of the following on the Aggregate Expenditure (AE) curve and on the equilibrium national income?

3.1 The government raises personal income tax rates.

3.2 High interest rates discourage new home purchases.

Aggregate Demand & Supply - Discussion Topic Questions:

 Indicate whether each of the following events is the cause or consequence of a shift in aggregate demand or supply. If it is a cause, what do you predict will be the effect on the price level and on real national income?

(a) Inflation fears rise as U.S. economic expansion continues into 1998.

(b) The Middle East countries decide to raise oil prices by 50% next year.