Bu204

The upward-sloping short-run aggregate supply curve differs in that higher aggregate price level leads to higher profits per unit whereas the vertical long-run aggregate supply curve changes in the aggregate price levels. In the long run there is no effect on the aggregate output.

4. My study partner could be right based on the fact that the US currency rate dropped tremendously where foreigners such as the UK can negotiate lower pricing

10. I would rank from most preferred to least preferred shock as follows:

a. Positive Demand Shock – increase in aggregate price levels which would accumulate in purchase increases.

b. Negative Supply Shock – production cost increase which reduces aggregate output and price level increases.

c. Positive Supply shock – growth in production which will generate high aggregate output and reduce price levels.

d. Negative Demand shock – collapse in businesses and wealth.

13a. Due to high rises of unemployment a decrease in household’s wealth in inevitable which would lead to less consumer spending and more borrowing.

13b. A lower tax rate would make the people keep more of their earnings or disposable income whereas a higher tax rate would reduce their disposable income which would lead to less spending.

14a. Increase in household taxes in an inflationary gap whereas in the recessional gap there is a decrease in taxes (this is because the government wants to aid the economy).

14b. People will have more money which drives the interest down so that the consumer will spend and invest more. In the long-run effect quantity of money will decrease, and people will have less to spend and invest.

14c. Increase in spending and cutting taxes in the short-run whereas in a long-run effect, the spending is reduced and tax increases.

Overall, monetary and fiscal policies are both regulated by the government. The government controls the banks in a recession or inflation gap. Additionally, they proactively cut taxes...