Use the information given at the start of problem 1.
(a) Suppose that autonomous planned spending decreases by 1,000 billion so that Aʹp = 4,000. Explain if this decrease is the result of increased willingness of financial market firms to lend to consumers and business firms or a collapse in the housing market, which reduces household wealth and housing construction. Derive the new equation for the aggregate demand curve. Compute the new amount of aggregate demand when the price level equals 2.0, 1.25, 1.0, 0.8, and 0.5. Graph the new aggregate demand curve.
(b) Given your graphs in part a of this problem and part b of problem 1, explain what the new shortrun equilibrium values of real GDP and the price level approximately are. (Note: Again you can find the exact equilibrium values of the real GDP and price level by proceeding as you did for part f of problem 1.)
(c) Explain what the new long-run equilibrium real GDP and equilibrium price level are, given the decrease in aggregate demand. Explain how the short-run aggregate supply curve shifts as the economy adjusts to the new long-run equilibrium. Compute the new nominal wage rate at the new long-run equilibrium price level and derive the new short-run aggregate supply curve, given the new nominal wage rate.
(d) Suppose policymakers want to prevent a rise in unemployment that would otherwise result from the drop in planned spending. Explain by how much fiscal policymakers would have to increase planned spending in order to prevent a rise in unemployment. Explain by how much monetary policymakers would have to increase the nominal money supply in order to prevent a rise in unemployment.