I need help for my ECON homework

1. Aggregate demand is a curve that shows the total quality of goods and services (real output) that will be purchases (demanded) at different price levels. With aggregate demand there is an inverse or negative relationship between the amount of real output demanded and the price level, so the curve slopes downward.

2. Spending by domestic consumers, businesses, government, and foreign buyers that is independent of changes in the price level are determinants of aggregate demand. The amount of changes in aggregate demand involves two components: the amount of the initial change in one of the determinants and a multiplier effect that multiplies the initial change. These determinants are also called aggregate demand shifts because a change in one of them, other things equal, will shift the entire aggregate demand curve.

a. Consumer spending can increase or decrease AD. If the price level is constant, and consumers decide to spend more, then AD will increase; if consumers decide to spend less then AD will decrease. Four factors increase or decrease consumer spending.

(1) Consumer wealth: if the real value of financial assets such as stocks, bond, or real estate increases, then consumers will feel wealthier, spend more, and AD increases. If the real value of financial assets falls, consumers will spend less and AD will decrease.

(2) Household borrowing: if consumers borrow more money, they can increase their consumption spending, thus increasing AD. Conversely, if consumers cut back on their borrowing for consumption spending, AD decreases. Also, if consumers increase their savings rate to pay off their debt, AD decreases.

(3) Consumer expectations: if consumers become more optimistic about the future, they will likely spend more and AD will increase. If consumers expect the future to be worse, they will decrease their spending and AD will decrease.

(4) Personal taxes: cuts in personal taxes increase disposable income and the capacity for consumer spending, thus increasing AD. A rise in personal taxes decreases disposable income, consumer spending, and AD.

b. Investment spending can increase or decrease AD. IF the price level is constant, and businesses decide to spend more on investment, then AD will increase. If businesses decide to spend less on investment, then AD will decrease. Three factors increase or decrease investment spending.

(1) Real interest rates: a decrease in real interest rates will increase the quantity of investment spending, thus increasing AD. An increase in real interest rates will decrease the quantity of investment spending, thus decreasing AD.

(2) Expected returns: If businesses expect higher returns on investments in the future, they will likely increase their investment spending today, so AD will increase. If businesses expect lower returns on investments in the future, they will likely decrease their investment spending today, and AD will decrease. These expected returns are influenced by expectations about future business conditions, the state of technology, the degree of excess capacity (the amount of unused capital goods), and business taxes.

(3) Positive future expectations, more technological progress, less excess capacity, and lower taxes will increase investment spending and thus increase AD. Less positive future expectations, less technological progress, more excess capacity, and higher taxes will decrease investment spending and thus decrease AD.

c. Government spending has a direct effect on AD, assuming that tax collections and interest rates do not change as a result of the spending. More government spending tends to increase AD and less government spending will decrease AD.

d. Net export spending can increase or decrease AD. If the price level is constant and net exports increase, AD will increase. If net exports are negative, then AD will decrease.

3. Aggregate supply is a curve that shows the total quantity of goods and services that will be produced (supplied) at different price levels. The shape of the aggregate supply curve will differ depending on the time horizon and how quickly input prices and output prices can change.

a. In the immediate short run, the aggregate supply curve is horizontal because both input prices and output prices remain fixed.

b. In the short run, the aggregate supply curve is upward sloping because input prices are fixed or highly inflexible and output prices are flexible, and thus changes in the price level increase or decrease the real profits of firms.

c. In the long run, the aggregate supply curve is vertical at the full-employment level of output for the economy because both input prices and output prices are flexible.

4. The determinants of aggregate supply that shift the curve include changes in the prices of inputs for production, change in productivity, and changes in the legal and institutional environment in the economy.

5. The equilibrium real output and the equilibrium price level are at the intersection of the aggregate demand and the aggregate supply curves. If the price level were below equilibrium, then producers would supply less real output than was demanded by purchasers. Competition among buyers would bid up the price level and producers would increase their output until and equilibrium price level and quantity was reached. If the price level were above equilibrium, then producers would supply more real output than was demanded by purchasers. Competition among sellers would lower the price level and producers would reduce their output until and equilibrium price level and quantity was reached. The aggregate demand and aggregate supply curves can also shift to change equilibrium.

a. An increase in aggregate demand would result in an increase in both real domestic output and the price level.

b. A decrease in aggregate demand reduces real output and increases cyclical unemployment but may not decrease the price level. The price level is largely influenced by labor costs, which account for most of the input prices for the production or many goods and services.

(1) There is the fear of starting a price war in which firms compete with each other on lowering prices regardless of the cost of production. Price wars hurt business profits, and they make firms reluctant to cut prices for fear of starting one.

(2) Firms are reluctant to change input prices if there are costs related to changing the prices or announcing the change. Such menu costs increase the waiting time before businesses make any price changes.

(3) If wages are determined largely by long-term contracts, it means that wages cannot be changed in the short run.

(4) Morale, effort, and productivity may be affected by changes in wage rates. If current wages are efficiency wages that maximize worker effort and morale, employers may be reluctant to lower wages because such changes reduce work effort and productivity.

(5) The minimum wage puts a legal floor on the wages for the least skilled workers in the economy.

c. A decrease in aggregate supply means there will be a decrease in real domestic output (economic growth) and employment along with a rise in the price level.

d. An increase in aggregate supply arising from an increase in productivity has the beneficial effects of improving real domestic output and employment while maintaining a stable price level.