2) Suppose a country begins in full equilibrium in the AS-AD model at point A: LEAS SRAJ * 1 The country has a large agricultural sector this could be a developing country where agriculture still has substantial weight in GDP. The country relies on a large dam for much of the water supply it uses for irrigation. A serious accident damages the dam. The water flow will be substantially curtailed for years. a) Use your diagram to illustrate the effect of the accident on the economy in the long run. Make any assumptions you think are necessary. b) You are a central banker in this country. What are your concerns? Do you worry about YR? About P? If you were to adopt policies to address these concerns, is there a tradeoff in terms of dealing with these two? Illustrate with your figure.

Consider the economy of Canada. Its households spend 55% of increases in their income and saves 45 %. There are no taxes and no foreign trade. Currently, Canada has a recessionary gap, the governments aim is to get actual output to increase by 220 billion dollars. How much of a tax cut do they need to have to achieve the overall increase in output of 220 billion dollars?

The following graph shows the aggregate demand curve (AD), the short-run aggregate supply curve (SRAS), and the long-run aggregate supply curve (LRAS) for a hypothetical economy. PRICE LEVEL 360 LRAS 300 240 180 120 60 0 0 4 8 12 16 REAL GDP (Trillions of dollars) Suppose the economy is in short-run equilibrium. The consistent with full-employment output. SRAS AD 20 20 24 ? of $4 trillion drives unemployment the unemployment rate Suppose public officials are concerned about the $4 trillion gap in the economy and the resulting higher-than-expected aggregate demand. The government has decided to follow a passive approach to policymaking.

2) The AD-AS diagram features a LRAS curve and an AD curve. An example is below. Suppose in this case the Solow growth rate is 3%. The rate of spending growth is 6%. a) Explain briefly where the Solow growth rate comes from and what it means. 10 €). → d) 9. -1% 0% LRAS AD b)_% b) Fill the blank marked b). Explain briefly why you fill it with the number you chose. Fill the blank marked c). Explain briefly why you fill it with the number you chose. Fill the blank marked d). Explain briefly why you fill it with the number you chose. Fill the blank marked e). Explain briefly why you fill it with the number you chose. Fill the blank marked f). Explain briefly why you fill it with the number you chose. c) __% YR