Name : Lê Minh Duy

Class : Advanced Program - K51B

Individual Assignment

Q1. Explain why we have short-run and long-run aggregate supply (AS)
curves ?
There are short-run and long-run AS curves because the relationship between AS
and price level depends crucially on the time horizon being examined.
In particular,in the short run,we have an upward-sloping AS curve which means a
decrease in the level of prices tends to reduce the quantity of goods and services
supplied.But in the long run,AS depends on the supplies of labor(L), capital(K),
natural resources(N) and avaiable technology(A) to produce the total quantity of
goods and services supplied regardless of what the price level happens to be.So
in the long run we have a vertical AS curve.
When the economy operates with the long-run AS curve,does it have no
umemployment ?
Even when the economy operates with the long-run AS curve,it still has some
unemployment which is called the nature rate of umemployment.

Q2.What does aggregate demand (AD) represent ?

Aggregate demand (AD) represents the quantity of all goods and services
demanded in the economy at any given price level.

Explain why AD curve is a downward-sloping curve ?

As the AD’s concept,we can see that AD curve is the relationship between the
quantity of goods and services and the price level.
And AD curve is a downward-sloping curve because it shows the negative
relationship between AD and price level.Which means : a fall in price level leads
to an increase in AD.That’s because of 3 reasons :
When price level falls :
_Consumers feel wealthier, which stimulates the demand for consumption goods.
_Interest rates fall, which stimulates the demand for investment goods.
_The exchange rate depreciates, which stimulates the demand for net exports.

Q3.A closed economy with :

S = -200 + 0.5Yd
I = 150
G = 200
T = 100
a.estimate the equilibrium output ?
From what we have :
S = -200 + 0.25Yd ⇒ C = 200 and 1 −MPC = 0.25 ⇔ MPC = 0.75

I = I =150
G = G = 200
T =T =100

We can estimate the equilibrium output :

1 − MPC
Yo = (C + G + I ) + T = 1900
1 − MPC 1 − MPC
b.Suppose that the government wants to increase output by 300.What can
the government do with Government spending ?
We have the equation about changes in output :
1 − MPC
∆Y = ∆G + ∆T = 4.∆G + (−3).∆T
1 − MPC 1 − MPC
As the question requires,we have :
∆Y = 300 and ∆T = 0
The equation becomes :
300 = 4.∆G ⇔ ∆G = 75
In conclusion,to increase output by 300,the government can increase
Government spending by 75.
c.The same assumption as question b.,what can the government do with tax
?
As the question requires,we have :
∆Y = 300 and ∆G = 0
The equation becomes :
300 = (−3) ∆T ⇔ ∆T = −100

In conclusion,to increase output by 300,the government can reduce tax by

100.

d.In order to keep the output the same,what should the government do with
spending after reducing tax by 100 ?
As the question requires,we have :
∆Y = 0 and ∆T = −100
The equation becomes :
0 = 4∆G + (−3)( −100 ) ⇔ ∆G = −75

In conclusion,to keep the output the same after reducing tax by 100,the
government should reduce Government spending by 75.