I have a few questions on an exam review that I need clarified.Here they are. 1)

Question

I have a few questions on an exam review that I need clarified.Here they are.

1)Using the production function explain why the economy is thoughtto be at its potential level of output when unemployment is greaterthan 0%

2)Explain why it is thought that using the CPI results in anover-estimation of the rate of inflation

3)What is the effect on the AD curve when each of the followinghappen.
* Improvement of technology
* in crease in government spending
*cut in taxes
*increase in interest rate
*a fall in the value of the stock market
*increase in the labor force
*increase in consumer confidence



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Explanation / Answer

3. The determinates of aggregate demand are consumption,investment, net exports, and government spending. The determinants of aggregate supply are legal environment,technology, and labor force. * Improvement of technology: technology is a determinant ofaggregate supply, and an improvement shifts the AS curveright. * Increase in government spending: that is an increase in adeterminant of aggregate demand, which shifts the AD curve to theright * Cut in taxes: lowering income taxes would lead to increasedconsumption, shifting the AD curve to the right. Additionally, lowering taxes on businesses affects the legalenvironment, shifting the AS curve to the right. * a fall in value of the stock market: investment decreases,shifting the AD curve to the left * increase in the labor force: more workers shifts AS to theright * increase in consumer confidence: increases investment and/orconsumption, shifting AD curve to the right

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