Reference no: EM13181243

Real-world economies get hit with lots of shocks to aggregate demand and real shocks. Some shocks clearly fit into the first category, some into the second, and some include a generous mix of both. Let's categorize the following shocks. Only one is a clear case of "both."

· Steelworkers go on strike, so less steel is produced.

· Businesses read about the glories of the Internet, so demand for high-tech investment purchases increases.

· U.S. Senators read about the glories of the Internet, so demand for high-tech government purchases increases.

· A series of investment banks like Lehman Brothers and Bear Stearns go bankrupt.

· Around 2000, the glories of the Internet fade a bit so innovations increase at a somewhat slower rate for a few years.

· Thus U.S. government launches two costly wars almost simultaneously, so government purchases increase dramatically (referring to WWII, of course).

· The U.S. government launches two costly wars almost simultaneously, using the draft to force many men to work much longer hours and supply more labor than they would otherwise.

8) Let's have some practice with the dynamic aggregate demand curve. If you want to draw it in you familiar y=mx+b format, you can think of it this way:

Inflation = (Growth in money + Growth in velocity) - Real Growth

a. When you look @ fixed dynamic aggregate demand curve...what is being held constant? :

Spending growth (growth in M + growth in v)

Real GDP growth (growth in Y)

Inflation (growth in P)

b. When you look at a shifting dynamic aggregate demand curve...what had to change to make the curve shift? :

Spending growth (growth in M + growth in v)

Real GDP growth (growth in Y)

Inflation (growth in P)

c. According to the quantity theory, which of the following statements must be false, and why? More than one may be false.

"Last year, spending grew at 10%, real growth was 4%, and inflation was 6%."

"Last year, spending grew at 4%, real growth was -2%, and inflation was 6%."

"Last year, spending grew at 100%, real growth was 0%, and inflation was 20%."

"Last year, spending grew at 5%, real growth was 5%, and inflation was 2%."

"Last year, spending grew at 10%, real growth was 5%, and inflation was -5%."

1) Here is a puzzle. A country with a relatively small + aggregate demand shock (a shift outward in the AD curve) may have a substantial economic boom, but sometimes countries that have massive increase in the AD curve (hyperinflation countries like Germany before WWII) don't seem to have massive eocnomic booms. Why does a small AD increase sometimes raise GDP much more than a giant AD increase?