DIREC TIONS: please complete the practice questions on separate paper by hand.AD/AS can show the economy at three different points:• Negative output gap (recessionary gap)• Full employment output (healthy economy, NRU 4-6%)• Positive output gap (inflationary gap)PRACTICE:1. Draw AD/AS at full employment output: (this is when LRAS, SRAS and AD are allhappy together)2. Draw AD/AS showing a negative output gap: (this is when output is lower than it wouldbe at full employment3. Draw AD/AS showing a positive output gap: (this is when output is higher than it wouldbe at full employment)4. Define stagflation5. Draw an AD/AS graph showing stagflation.6. If the government steps in to address a positive or negative output gap and uses fiscaland/or monetary policy, which AD/AS curve will shift and why?7. If the government takes no policy action to address a positive or negative output gap,which AD/AS curve will shift and why?8. Explain how fiscal policy can be used to correct a negative and positive output gap.9. Explain how monetary policy can be used to correct a negative and positive output gap.10. Draw a negative output gap on the Phillips curve.11. Draw full employment on the Phillips curve.12. Draw a positive output gap on the Phillips curve.13. How can we link AD/AS to the loanable funds market?14. How can we link AD/AS to the money market?15. How can we link AD/AS to the FOREX market?

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Answered: 1. Draw AD/AS at full employment…

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1. Draw AD/AS at full employment output: (this is when LRAS, SRAS and AD are all happy together)

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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