Homework 4: Aggregate Economy

ECON 101 – Macroeconomics

Professor Schenk
Due: July 26, 2010

1. Graph the aggregate and aggregate supply curve given from the table below (in billions). What is the
equilibrium price level and output?

CPI Aggregate Aggregate

Supply Demand
100 $6,000 $14,000
105 7,000 13,500
110 8,000 13,000
115 9,000 12,500
120 10,000 12,000
125 10,500 11,500
130 11,000 11,000
135 11,500 10,500
140 12,000 10,000
145 12,250 9,500
150 12,500 9,000
155 12,750 8,500
160 13,000 8,000
165 13,000 7,500
170 13,000 7,000

2. Now suppose the aggregate demand changes to the levels specified below. Graph the new aggregate
demand on the same chart.
a. What is the new equilibrium price level and output?
b. How much inflation did the economy experience with the change in aggregate demand? Give
your answer as a percentage.
c. Did unemployment increase or decrease?
 CPI Aggregate
Demand
100 $16,000
105 15,500
110 15,000
115 14,500
120 14,000
125 13,500
130 13,000
135 12,500
140 12,000
145 11,500
150 11,000
155 10,500
160 10,000
165 9,500
170 9,000

3. Keeping in the mind the answers from question 2, now suppose that productivity increases 3 percent.
Did the aggregate supply curve shift to the left or to the right? What happens to inflation? What
happens to unemployment?

4. Consider the following relationship between aggregate expenditures and real income.

Real Income Aggregate Expenditures

0 5,000
100 5,050
200 5,100
300 5,150
400 5,200
500 5,250

a. What is the marginal propensity to consume?

b. How much is autonomous expenditures in the table above?
c. How much will be spent in the economy when real income is $500?
d. Suppose the government passes a $3,000 stimulus. As a result, government will increase
autonomous expenditures by $3,000. How much will real income be after the stimulus?
e. Using the answer above, how much will be spent after the stimulus?