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:

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?

a. The price level changes.

i. Which curve will shift?

ii. Which direction does it shift?

iii. What will happen to aggregate output?

iv. What will happen to the price level?

b. Consumer confidence declines.

i. Which curve will shift?

ii. Which direction does it shift?

iii. What will happen to aggregate output?

iv. What will happen to the price level?

c. The supply of resources increases.

i. Which curve will shift?

ii. Which direction does it shift?

iii. What happens to aggregate output?

iv. What happens to the price level?

d. The wage rate increases.

i. Which will curve shift?

ii. Which direction does it shift?

iii. What will happen to aggregate output?

iv. What will happen to the price level?

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

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

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

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

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

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

a. 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.

b. 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?

c. 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?

d. In which years did disinflation occur?

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