Global Economics: Assume The AS Curve Is Positively Sloped

Global Economics1 Assume That The AS Curve Is Positively Sloped

Assume that the AS curve is positively sloped. After an economic shock, we observe that the equilibrium price level is lower than before but real equilibrium output has increased. Which one of the following events, by itself, could explain this observation:

• An increase in input prices
• An increase in factor productivity
• An increase in exports
• A reduction in investment expenditure
• A decrease in the tax rate

Under what circumstances would an expansionary demand shock result in virtually no increase in real income but a large increase in the price level:

• If the demand shock occurred in the flat range of the AS curve
• If the demand shock occurred in the intermediate range of the AS curve
• If the demand shock occurred in the steep portion of the AS curve
• If unit costs were constant before and after the demand shock
• If input prices decreased

The government can use fiscal policy (the power to spend or not) to shift aggregate demand. There are two ways that the government can slow down the economy. Choose one and explain how this would work.

If the Bank of Canada increases the money supply, we would expect the:

• Interest rate to fall, and the AD curve to shift to the left
• Interest rate to fall, and the AD curve to shift to the right
• Interest rate to rise, and the AD curve to shift to the left
• Interest rate to fall, and the AD curve to become flatter
• None of the above

If Canadian interest rates rise relative to those in other countries, the:

• Demand for Canadian dollars in international exchange markets will increase
• Demand for Canadian dollars in international exchange markets will fall
• Exchange rate will stay the same
• Canadian dollar will appreciate
• Both (a) and (d)

With reference to your answer to question 5, you would expect:

• Net exports to increase and the AD curve to shift to the left
• The AD curve to shift to the right
• Net exports to decrease and the AD curve to shift to the left
• Net exports to decrease and equilibrium levels of Y and P to increase
• None of the above

At initial equilibrium (AD=AS=Ype), an increase in the money supply shifted the AD curve to the right because:

• An excess demand for money was created in the money market; thus interest rates and investment expenditure will both increase
• Consumption expenditure decreased as real GDP decreased
• Real wealth decreased
• A decline in interest rates stimulated more investment expenditures
• The exchange rate appreciated

For an open economy, an increase in the money supply is also likely to shift the AD curve to the right because:

• Lower interest rates lead to larger capital inflows and a depreciated exchange rate
• Higher interest rates lead to lower net exports
• An appreciation of the domestic currency and higher net exports
• Lower interest rates lead to higher capital outflows, an appreciated exchange rate, an increased net exports
• None of the above are correct

Explain the effects of an increase in the nominal money supply on Real GDP and the price level using the money supply, investment levels, and AS/AD graphs

An increase in the nominal money supply primarily impacts the economy through its influence on interest rates and aggregate demand. Initially, as the central bank injects more money into the economy, the increased money supply leads to a decline in interest rates, assuming the demand for money remains unchanged. Lower interest rates stimulate higher investment expenditures by reducing the cost of borrowing. This escalation in investment shifts the aggregate demand (AD) curve outward (to the right), reflecting increased overall demand in the economy.

Graphically, in the money supply diagram, an increase in the money supply shifts the money supply curve to the right, which, in turn, decreases the equilibrium interest rate. In the investment level diagram, lower interest rates encourage more borrowing and investment, moving investment levels upward. Correspondingly, the AS/AD graph exhibits a rightward shift of the AD curve, leading to a higher equilibrium output (Y) and an increased price level (P). The new equilibrium point shows elevated real GDP and inflationary pressure, illustrating the broader economic impact of monetary expansion.

This process highlights the interconnected nature of monetary policy, investment, aggregate demand, and price level adjustments in the economy. The ultimately higher output and price level emphasize how monetary expansion can boost economic activity but also raise concerns about inflation if not matched with productive capacity growth.

Accounting: Valuation of Indigo Contract and Bond Pricing

Indigo Company expects a series of semiannual payments of $10,000 over five years, starting six months from today. To determine how much Indigo should be willing to pay for this contract, given a 16% annual return, we compute the present value of an annuity of $10,000 payments, discounted at the semiannual rate.

Since the annual return is 16%, the semiannual discount rate is 8%. The total number of payments is 10 (two per year over five years). The present value (PV) of these payments is calculated as:

PV = PMT × [1 - (1 + r)^-n] / r

Where:

• PMT = $10,000
• r = 0.08
• n = 10

Computing, PV = 10,000 × [1 - (1 + 0.08)^-10] / 0.08 ≈ 10,000 × 6.7101 ≈ $67,101

Thus, Indigo should be willing to pay approximately $67,101.00 for the contract, matching option c.

Regarding the DEF Corporation bonds issued in 1993, with a face value of $100,000, a coupon rate of 9%, and market interest rate of 12%, the bonds were issued at a discount. The market value is calculated using the present value of future coupon payments plus the present value of the face value, discounted at the market rate.

The semiannual coupon payment is $4,500 (9% × $100,000 / 2). The present value of coupons is computed as the annuity of 20 periods (10 years, semiannual), discounted at 6% per period (12% annual rate / 2). The present value of the face value is discounted as a lump sum. Calculations yield a bond price of approximately $82,795, which corresponds to option d.

The journal entries for interest payments involve debiting interest expense and crediting cash or interest payable, based on accrued interest. For each semiannual period:

• Interest expense = bond's carrying amount × market rate per period
• Cash paid = coupon payment of $4,500

These entries reflect standard accounting procedures for bond interest payments.

The Kitchener bond issuance calculations involve determining semiannual interest payments, assessing whether bonds are issued at par, discount, or premium, estimating the initial market value, and journal entries for issuance and first interest payment.

a) Semiannual payment = (8% annual rate / 2) × face value

b) Total number of payments = 15 years × 2 = 30

c) If the coupon rate (8%) is below the market rate (10%), bonds are issued at a discount.

d) Market value estimated via present value calculations shows it is less than face value, confirming issuance at a discount.

e) The journal entry at issuance debits cash for the present value, credits bonds payable, and at the first interest date, debits interest expense and credits cash to record interest payments.

References

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