Examine actors that affect Aggregate Demand and Aggregate Supply

Question

Assignment: AD, AS, Unemployment and Inflation

In this Assignment, you will examine factors that affect Aggregate Demand (AD) and Aggregate Supply (AS). You will compute the rates of inflation using the U.S. Consumer Price Index (CPI) and then examine how the results impacts nominal interest rates, inflation, disinflation, and deflation.

Instructions: Answer all of the following questions. You are required to follow proper APA format. Read the Criteria section below for more information before you begin this Assignment.

In this Assignment, you will be assessed on the following outcome:

MT445-4: Examine how U.S. macroeconomic indicators are used to gauge economic health.

Sample paper

AD, AS, Unemployment and Inflation

In this Assignment, you will examine factors that affect Aggregate Demand (AD) and Aggregate Supply (AS). You will compute the rates of inflation using the U.S. Consumer Price Index (CPI) and then examine how the results impacts nominal interest rates, inflation, disinflation, and deflation.

Instructions: Answer all of the following questions. You are required to follow proper APA format. Read the Criteria section below for more information before you begin this Assignment.

In this Assignment, you will be assessed on the following outcome:

MT445-4: Examine how U.S. macroeconomic indicators are used to gauge economic health.

1. Determine whether each of the following would cause a shift of the aggregate demand (AD) curve, a shift of the aggregate supply (AS) curve, neither, or both. Which curve will shift, and in which direction? What will happen to aggregate output and the price level in each case?

1. The price level changes.

1. Which curve will shift?

No curve will shift since changes in aggregate demand and supply are not influenced by the price level but by other factors.

1. Which direction does it shift?

The curves shift in neither direction since price level does not affect the demand and supply curves.

• What will happen to aggregate output?

Aggregate output will change until the price level achieves some stability.

1. What will happen to the price level?

Price level changes in the long-run are not affected.

1. Consumer confidence declines.

1. Which curve will shift?

The aggregate demand curve will shift; aggregate supply curve does not shift.

1. Which direction does it shift?

The aggregate demand curve shifts to the left.

• What will happen to aggregate output?

Aggregate output declines due to reduced demand.

1. What will happen to the price level?

The price level will reduce due to the decline in demand.

1. The supply of resources increases.

1. Which curve will shift?

The aggregate supply curve will shift, while the aggregate demand curve remains constant.

1. Which direction does it shift?

The aggregate supply curve shifts to the right.

• What happens to aggregate output?

The aggregate output increases since producers are able to provide more goods.

1. What happens to the price level?

The price level declines.

1. The wage rate increases.

1. Which will curve shift?

The aggregate demand curve will shift.

1. Which direction does it shift?

The aggregate demand curve shifts to the right.

• What will happen to aggregate output?

The aggregate output will increase.

1. What will happen to the price level?

The price level will generally increase.

2. Determine whether the following statements are true or false.

1. Some people who are officially unemployed are not in the labor force.

This is false since one must be actively looking for a job to qualify as unemployed.

1. Some people in the labor force are not working.

This is true because it represents the fraction of labor force actually not working.

• Everyone who is not unemployed is in the labor force.

This is false because some people opt not to work.

1. Some people who are not working are not unemployed.

True. This is because not everyone is willing to work. (McEachern, 2009).

3. Refer to the following data on the U.S. consumer price index and answer the questions below.

            Year   CPI                 Year   CPI                 Year   CPI                 Year   CPI

1988   118.3              1993   144.5              1998   163.0              2003   184.0

1989   124.0              1994   148.2              1999   166.6              2004   188.9

1990   130.7              1995   152.4              2000   172.2              2005   195.3

1991   136.2              1996   156.9              2001   177.1              2006   201.8

1992   140.3              1997   160.5              2002   179.9

1. Compute the inflation rate for each year 1988-1989, 1989-1990, 1990-1991, 1991-1992 etc. using the CPI data for 1988-2006 in the table above. Show your work.

The inflation rate is calculated as: (CPI₂ – CPI₁)/CPI₁ x 100

1989 = 4.82%                           1998 = 1.56%

1990 = 5.40%                           1999 = 2.21%

1991 = 4.21%                           2000 = 2.85%

1992 = 3.01%                           2001 = 2.85%

1993 = 2.99%                           2002 = 1.58%

1994 = 2.56%                           2003 = 2.28%

1995 = 2.83%                           2004 = 2.66%

1996 = 2.95%                           2005 = 3.39%

1997 = 2.30%                           2006 = 3.33%

1. Which years were years of inflation? What do you expect to happen to real interest rates during this time period if nominal rates remain unchanged?

The years of inflation were 1989, 1990, 1991, 1992, 2005, and 2006. During inflation, interest rates are likely to increase.

1. In which years did deflation occur? What do you expect to happen to real interest rates during this time period if nominal rates remain unchanged?

There was no year in which deflation occurred, since deflation involve having below zero inflation rates. During deflation, real interest rates would remain unaffected.

1. In which years did disinflation occur?

Disinflation occurred in years 1991, 1992, 1993, 1994, 1997, 1998, 2001, 2002, and 2006.

4. What are the costs associated with unanticipated inflation? Why do these inflation costs differ from those associated with anticipated inflation?

The costs associated with unanticipated inflation include uncertainty by the consumers, low savings, hoarding costs, lower competitiveness, and instability in economic cycles, and others (Hall,1982). Inflation costs differ from anticipated inflation costs because while inflation costs are real, anticipated inflation costs are driven by the consumers’ future perceptions of the economy.

Criteria

• This Assignment should be written in Standard English and demonstrate exceptional content, organization, style, and grammar and mechanics.
• Respond to the questions in a thorough manner, providing specific examples where asked.
• Your sources and content should follow proper APA format (A title page is not required). (Review the APA formats found in the Kaplan Writing Center. To access the Kaplan Writing Center, select this link.).
• Review the grading Rubric to ensure all points have been captured in the paper.

References (add references in APA format below)

Hall, R. E. (1982). Inflation. Chicago: University of Chicago Press.

McEachern, W. A. (2009). Macroeconomics: A contemporary introduction. Mason [Ohio: Thomson/South-Western.

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