Critical Thinking Questions
Why would an economist choose either the neoclassical perspective or the Keynesian perspective, but not both?
On a microeconomic demand curve, a decrease in price causes an increase in quantity demanded because the product in question is now relatively less expensive than substitute products. Explain why AD does not increase for the same reason in response to a decrease in the aggregate price level. In other words, what causes total spending to increase if it is not because goods are now cheaper?
Economists expect that as the labor market continues to tighten going into the latter part of 2015 that workers should begin to expect wage increases in 2015 and 2016. Assuming this occurs and it was the only development in the labor market that year, how would this affect the AS curve? What if it was also accompanied by an increase in worker productivity?
If new government regulations require firms to use a cleaner technology that is also less efficient than what was previously used, what would the effect be on output, the price level, and employment using the AD/AS diagram?
During the spring of 2016, the Midwestern United States, which has a large agricultural base, experiences above-average rainfall. Using the AD/AS diagram, what is the effect on output, the price level, and employment?
Hydraulic fracturing—fracking—has the potential to significantly increase the amount of natural gas produced in the United States. If a large percentage of factories and utility companies use natural gas, what will happen to output, the price level, and employment as fracking becomes more widely used?
Some politicians have suggested tying the minimum wage to the consumer price index (CPI). Using the AD/AS diagram, what effects would this policy most likely have on output, the price level, and employment?
If households decide to save a larger portion of their income, what effect would this have on the output, employment, and price level in the short run? What about the long run?
If firms become more optimistic about the future of the economy and, at the same time, innovation in 3-D printing makes most workers more productive, what is the combined effect on output, employment, and the price level?
If Congress cuts taxes at the same time that businesses become more pessimistic about the economy, what is the combined effect on output, the price level, and employment using the AD/AS diagram?
Suppose the level of structural unemployment increases. How would the increase in structural unemployment be illustrated in the AD/AS model? Hint—How does structural unemployment affect potential GDP?
If foreign wealth-holders decide that the United States is the safest place to invest their savings, what would the effect be on the economy here? Show graphically using the AD/AS model.
The AD/AS model is static. It shows a snapshot of the economy at a given point in time. Both economic growth and inflation are dynamic phenomena. Suppose economic growth is 3 percent per year and AD is growing at the same rate. What does the AD/AS model say the inflation rate should be?
Explain why the SRAS curve might be fairly flat in the Keynesian zone of the SRAS curve. How might we tell if we are in the Keynesian zone of the AS?
Explain why the SRAS curve might be vertical in the neoclassical zone of the SRAS curve. How might we tell if we are in the neoclassical zone of the AS?
Why might it be important for policymakers to know which zone of the SRAS curve the economy is in?
In your view, is the economy currently operating in the Keynesian, intermediate or neoclassical portion of the economy’s AS curve?
Are Say’s law and Keynes’ law necessarily mutually exclusive?