Macro for today, 9th ed. Textbook solution is incorrect. Assume an economy opera

Question

Macro for today, 9th ed. Textbook solution is incorrect.

Assume an economy operates in the intermediate range of its aggregate supply curve. State the direction of shift for the aggregate demand or aggregate supply curve for each of the following changes in conditions. What is the effect on the price level? On real GDP? On employment? a. The price of crude oil rises significantly. b. Spending on national defense doubles. c. The costs of imported goods increase. d. An improvement in technology raises labor productivity.

Explanation / Answer

a. As the price of the crude oil is raised its demand curve would shift leftwards due to decrease in demand as the demand is inversely proportional to the price of the commodity. And supply curve would shift towards right as supply is directly proportional to the price of the commodity.

Price level-increased

Real GDP - decrease due to lesser affordablity, it won't be used in other activities.

Emploment - decrease due to lesser work because of high price of oil.

B. Everything would decrease. As the money would not be invested upon the producing class of the economy or the labour class. Therefore, nothing would be produced or bought in extra rather lack of funding would reduce it.

C. Price level would increase. Real GDP would increase as people would prefer to buy domestic goods. Employment would also increase due to increase in both demand and supply.

D. Price level decreases due to higher productivity. Real GDP would increase. Employment would decrease as the technology would take its place. Demand and supply both would increase

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