Aggregate Supply and Demand

1. The equation for expenditure GDP is

2. Sketch a fully labeled aggregate supply and demand diagram for an economy that is in full employment equilibrium.

a) Add to the diagram an aggregate demand curve that demonstrates an economy with a recessionary gap. Clearly label both the new curve and the recessionary gap.

b) FULLY explain four reasons that the aggregate demand curve might have made the above shift to the left.

c) What is the effect of this recessionary gap on real GDP, the unemployment rate, and the inflation rate?

d) Add to the diagram an aggregate demand curve that demonstrates an economy with an inflationary gap. Clearly label both the new curve and the inflationary gap.

e) What is the effect of this inflationary gap on real GDP, the unemployment rate, and the inflation rate?

3. Sketch a fully labeled aggregate supply diagram. Add to the diagram a new aggregate supply line that would occur due to an improvement in technology that improves productivity.

4. If you have not already done so, add an aggregate demand curve to the diagram in question 3. What effect did the aggregate supply curve shift have on real GDP, the unemployment rate the inflation rate?

5. Suppose an economy is operating at full employment equilibrium. What component of the GDP will be affected and what will happen to real GDP, the unemployment rate, and the inflation rate levels in the face of each of the following events?

a) an increase in income taxes

b) an increase in business investment

c) the price of raw materials used in the production process increases

d) an increase in the value of the Canadian dollar

e) a decrease in interest rates

f) productivity improves as new technology is introduced

g) a decrease in highway improvement projects by the government

h) an increase in consumer savings

i) the economic climate in Canada looks strong

j) an increase in import spending