: Use an AD–AS graph to illustrate the initial equilibrium and the short-run equilibrium after the shocks. Do we know with certainty whether in the new equilibrium the output level will be higher or lower than potential GDP?  B: Suppose that the Fed decides not to intervene with monetary policy. Show how the economy will adjust back to long-run equilibrium.  C: Now suppose that the Fed decides to intervene with monetary policy. If the Fed’s policy is successful, show how the economy adjusts back to long-run equilibrium.

For Shock F: Suppose the economy starts in the long run equilibrium. Illustrate changes that the shock will cause in the short run (using AD-SRAS). Explain why each curve shifts. Determine how the price level and output will be affected in the short run. Mark the output gap on the diagram. Is the output gap positive or negative? Is the economy is booming, or is it in a recession? On the same diagram illustrate how the economy will adjust to the shock in the long run and explain the mechanism. Determine how the price level and output will be affected in the long run.   F. The central bank decides to raise the money supply; as a result, the interest rate in the economy goes down   As a result of this shock, in the short run the (SRAS Curve/AD Curve) will shift? In consequence, in the short run prices and output will? In the short run, there will be a ? (negative/postive) output gap,which means there will be a ? (boom/recession) As time passes, because of high unemployment the…

The following events have occurred at times in the history of the United States: 1. The world economy goes into an expansion. 2. U.S. businesses expect future profits to rise. 3. The government increases its expenditure on goods and services in a time of war or increased international tension. Explain the combined effects of these events on U.S. real GDP and the price level, starting from a position of long-run equilibrium. The graph shows an economy in long-run equilibrium. The world economy goes into an expansion, U.S. businesses expect future profits to rise, and the government increases its expenditure on goods and services in a time of war or increased international tension. Draw one new curve that shows the combined effect of the three events. Label it. Draw a point at the new short-run macroeconomic equilibrium. 140- 130- Price level (GDP deflator, 2012=100) 120- 110- 100- 90- 80- 18.0 LAS SAS AD G 19.0 20.0 21.0 Real GDP (trillions of 2012 dollars) Denonh: the ohiarte conciliad…

Suppose the economy is in a situation of moderate unemployment, and then an exogenous increase of aggregate demand occurs.  (Assume the aggregate demand schedule follows the pattern set out by the mainstream story.)  Use short run aggregate supply and aggregate demand analysis to discuss in detail the effects of this demand change on the price level and real GDP in the short run. Explain how the situation could change in the long run after the happenings in the first part.