Evaluate whether each of the following statements is true or false. Explain your
ID: 1193051 • Letter: E
Question
Evaluate whether each of the following statements is true or false. Explain your answer and provide supporting rationale.
The short-run aggregate supply (SAS) curve slopes upward because households spend more as their incomes increase.
The long-run aggregate supply curve can never shift.
Either a decrease in the nominal money supply by the Federal Reserve, all else held constant, or an increase in the price level, all else held constant, will shift the aggregate demand (AD) curve to the left.
The Keynesian portion of the short-run aggregate supply (SAS) curve would be relevant during a recessionary situation.
Stagflation occurs when the aggregate demand (AD) curve shifts out on the upward sloping portion of the short-run aggregate supply (SAS) curve.
Evaluate whether each of the following statements is true or false. Explain your answer and provide supporting rationale, using graphs to support your answer. You can create graphs by hand and take pictures and upload them with your answers, or you may use Word or Excel, and upload the file created by these software packages.
If the real money demand is greater than the real money supply, interest rates must rise to reach equilibrium in the money market as institutions sell bonds to obtain more money.
The federal government’s control of the money supply, which influences interest rates, is the primary tool that policy makers use to impact the macro economy.
A decrease in the reserve requirement decreases the money supply because banks have fewer reserves.
The real money demand curve shows how households and businesses change their spending in response to changes in the interest rate.
Both an increase in the nominal money supply by the Federal Reserve and an increase in the price level will cause the real money supply curve to shift to the right.
Explanation / Answer
1) The given statement is FALSE. The short-run aggregate supply curve slopes upwards because higher prices for goods and services make output more profitable and enable business to expand their production. And the spending decision of the households affects the aggregate demand curve and not the aggregate supply curve.
2) The long-run supply curve can never shift. The statement is FALSE. There are many events that shift the long-run aggregate supply curve. For example, change in labor force, change in physical capital stock etc.
3) Either a decrease in the nominal money supply by the Federal Reserve, all else held constant, or an increase in the price level, all else held constant, will shift the aggregate demand (AD) curve to the left.
The given statement is TRUE because both of the events decrease the purchasing power of the consumer group and as a result the private final consumption expenditure will fall down. Thus expenditure is an important component of aggregate demand. So as a result, the AD curve will shift to left.
4) The Keynesian portion of the short-run aggregate supply curve would be relevant during a recessionary situation. The statement is TRUE because the assumption is that real output can change from change in aggregate demand without the price level changing. This would be most relevant in a recessionary situation, where there is significant unemployment and excess capacity. Increases in aggregate demand could result in increases in real output because there would be little tendency for wages and prices to rise in this case.
5) The given statement is FALSE because Stagflation meant inflation with stagnant output. It occurs when there is an upward shift in the short-run aggregate supply curve resulting from a supply shock, such as an increase in the price of oil. As a result, the equilibrium is stuck at higher price level and a lower level of real output. The economy can both have inflation and be stagnating at a lower level of real output and employment.
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