MB 2104 ECONOMICS

TUTORIAL WEEK 10
October 26, 2022

1. What will happen to the position of the SAS curve in the following circumstances:
a. Productivity rises by 3 percent and wages rise by 3 percent.
b. Productivity rises by 3 percent and wages rise by 5 percent.
c. Productivity rises by 3 percent and wages rise by 1 percent.

2. Demonstrate the following two cases using the AS/AD model. What will happen in the long run
if government does nothing?
a. Inflationary gap.
b. Recessionary gap.
c. What could government do in (a) and (b) to keep the price level constant?

3. Match each of the following reasons for the aggregate demand’s slope with their correct
explanation:
a. Money wealth effect
b. Interest rate effect
c. International effect
d. Multiplier effect
1. As domestic prices fall, exports increase and
imports decrease
2. As prices fall, people can buy more with the
accumulated money that they hold.
3. As prices fall, people do not need to hold as
much cash, so they deposit cash in banks,
making more available to lend.
4. Initial increases in expenditures are magnified
as the effects of the initial increases circulate
through the economy.

4. An economy is currently at point A in the graph below.

a. Is the economy in a recessionary gap or an inflationary gap?

b. How would this economy return to equilibrium if fiscal or monetary policy alone were
used? On the graph, label the new equilibrium point that would result from this policy
as point B. (Do not draw any new curves.)
c. How would this economy return to equilibrium if no policy action were taken? On the
graph, label the new equilibrium point that would result from this policy as point C. (Do
not draw any new curves.)
5. State whether the following events would shift the AD curve to the right, to the left, or not at
all:

a. Foreign income decreases.

b. The exchange rate value of the dollar falls.
c. Consumers expect lower income in the future.
d. The distribution of income shifts toward wealthier families that purchase more imported
goods.
e. Home heating oil prices rise, so people switch to natural gas.
f. The U.S. price level rises as expected.