Aggregate Demand and Aggregate Supply
BU204-1: Examine how consumer spending, savings, investment spending, and other factors contribute to long-run economic growth.
1. A business contemplates building a new manufacturing facility and will need to seek loanable funds of $130 million. It expects that the new facility will yield a 12% return on investment (ROI). What is the current loanable funds market equilibrium rate depicted in the graph below? Given the current loanable funds market equilibrium depicted in the graph below, is it likely that the firm will borrow the money to build the new facility? Why?
Description: A graph showing the supply, in a red straight line rising to the right, and demand, in a straight blue line descending to the right, for loanable funds with the market interest rates on the vertical axis and money available on the horizontal axis. Initial equilibrium is at 8% interest rate and 300 million dollars.
(Enter response here.)
2. Given the income and consumption for the three individuals in the table below, calculate their individual marginal propensity to consume (MPC) and the total marginal propensity to consume for the entire group.
| Name | Income | Consumption | MPC |
| Anne | $20,000 | $17,000 | (Enter response here.) |
| Brad | $30,000 | $22,000 | (Enter response here.) |
| Claire | $40,000 | $24,000 | (Enter response here.) |
| Total | (Enter response here.) | (Enter response here.) | (Enter response here.) |
3. The following questions relate to long-run macroeconomic equilibrium and the stock market boom.
Assume that a hypothetical economy is at long-run macroeconomic equilibrium with full employment and stable prices. Suddenly, the stock market prices increased much more than expected, increasing investors’ wealth and causing a short-term period of increased optimism about the future of the economy.
a. In the short-run, will the AS curve or the AD curve shift? In which direction will it shift?
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b. In the short-run, what will happen to the price level and the quantity of output (real GDP)?
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c. Explain what, if any, impact will there likely be on workers’ wages and the reasons for this impact.
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d. In the long-run, which curve will shift due to the change in wages and price expectations created by the stock market boom? In which direction will it shift?
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e. When the economy returns to its long-term output level, how will the new long-run macroeconomic equilibrium differ from the original equilibrium?
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4. Studies indicate that net exports and net capital outflows tend to be equal.
a. Explain why net exports and net capital outflows always tend to be equal.
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b. Explain how a change in interest rates can lead to changes in net exports?
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5. Assume there is a decrease in the demand for goods and services, which leads to a decrease in the real GDP, and eventually the economy falls into recession.
a. When the economy enters a recession due to a decline in demand, what will happen to the price level?
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b. Assume there is no government intervention. Explain how the economy will eventually get back to the natural rate of output (real GDP)?
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6. Several macroeconomic variables decline during recessions. One of these variables is the GDP.
a. What other variables, besides real GDP, tend to decline during recessions? Given the definition of real GDP and its components, explain the expected declines in these economic variables.
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b. Empirical studies indicate that the long-run trend in real GDP of the USA has an upward trend. How is this possible given business cycles and macroeconomic fluctuations? What factors explain the upward trend despite the cycles?
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