Question

Draw an economy in long run equilibrium.

b) Suppose that the U.S. dollar depreciates. Which curve will shift as a result of the shock?

c) Illustrate the shift on your graph above.

d) Explain what happens to Y, P, and unemployment in the short-run.

e) State whether the economy is at a full-employment equilibrium, below full-employment equilibrium, or above full- employment equilibrium after the shock. Principles of Macroeconomics

f) State whether the unemployment rate is above or below the Natural Rate of Unemployment (NRU) after the shock.

g) State whether the economy has an expansionary gap or a contractionary gap after the shock.

h) State whether the economy experiences cost-push inflation, demand-pull inflation, or no added inflation.

i) If Congress uses fiscal policy to correct the economy, which curve will shift and in which direction? Illustrate the shift on your graph above.

j) List 3 fiscal policies that Congress could enact to correct the economy (specifically state whether the policy is an increase or decrease)

Answer 1

A -

B - AD curve will shift right as a result of this because exports rise as dollar depreciates

C - Real GDP and price level will rise and unemployment will fall.

D - Economy is above the full employment level after this shock

E - Rate of unemployment is below the natural rate of unemployment

F - Gap is expansionary in nature

G- Economy is experiencing demand pull inflation

H - AD will shift in left (inward direction)

I - Three fiscal policies are -

1 - Increase in taxes

2 - Decrease in spending

3 - Decrease in transfer payments