Unit 8 Managerial Economics

Determine whether each of the following would cause a shift of the aggregate demand (AD) curve, a shift of the aggregate supply (AS) curve, neither, or both. Which curve will shift, and in which direction? What will happen to aggregate output and the price level in each case?

The price level decreases.

 

 

Which curve will shift?

Which direction does it shift?

 

What will happen to aggregate output?

 

What will happen to the price level?

 

 

Consumer confidence increases.

 

Which curve will shift?

 

Which direction does it shift?

 

What will happen to aggregate output?

 

What will happen to the price level?

 

The supply of resources decreases.

 

Which curve will shift?

Which direction does it shift?

What happens to aggregate output?

 

What happens to the price level?

 

 

The wage rate decreases.

 

Which will curve shift?

 

Which direction does it shift?

 

What will happen to aggregate output?

 

What will happen to the price level?

 

Explain whether each of the following statements is true or false.

 

The majority of people who are officially unemployed are not in the labor force.

Some people in the labor force are not working.

Everyone who is not unemployed is in the labor force.

 

Not all people who are not working are unemployed.

 

 

Refer to the following data on the U.S. consumer price index and answer the questions below.

Year

 

CPI

 

Year

 

CPI

Year

CPI

Year

CPI

 

1988

 

125.8

1993

 

152.0

 

1998

 

160.5

2003

191.5

1989

131.5

 

1994

 

155.7

1999

 

174.1

 

2004

 

196.4

1990

137.5

1995

159.9

 

2000

 

179.7

2005

 

202.8

 

1991

 

143.7

 

1996

 

164.4

 

2001

 

184.6

 

2006

 

209.3

 

1992

 

147.5

 

1997

 

168.0

 

2002

 

187.4

 

Compute the inflation rate for each year (1988–1989, 1989–1990, 1990–1991, 1991–1992 etc.) using the CPI data for 1988–2006 in the table above. Show your work.

 

Which years were years of inflation? What would you expect to happen to real interest rates during this time period if nominal rates remained unchanged?