Question

1. Sketch a graph using instructions below and answer the following questions.

Label both axes and all curves.

Draw LRAS and show a potential equilibrium output as Y*.

Draw SRAS.

Have your AD1 intersect this SRAS significantly below the potential output. Label AD1-SRAS equilibrium as point A.

Have your AD2 intersect the same SRAS slightly above the potential output. Label AD2-SRAS equilibrium as point B.

Graph:   

2. Refer to the graph in part a):

Suppose the economy is currently at point A. Does the economy have an output gap? If yes, then what type of a gap?

Answer: (circle the correct answer)                                                                                             

No output gap      Expansionary output gap     Recessionary output gap

3. Refer to the graph in part a):

Suppose the economy is currently at point B. Does the economy have an output gap? If yes, then what type of a gap?

Answer: (circle the correct answer)                                                                                         

No output gap      Expansionary output gap     Recessionary output gap

4. Refer to the graph in part a):

Suppose the economy is currently at point A. What type of policy should be used to close the output gap?

Answer: (circle the correct answer)                                                                                          

Contractionary fiscal policy     Expansionary fiscal policy

5. Refer to the graph in part a):

Suppose the economy is currently at point A. What type of policy should be used to close the output gap?

Answer: (circle the correct answer)                                                                               

Increase in the government spending      Decrease in the government spending     

6. Refer to the graph in part a):

Suppose the economy is currently at point B. What type of policy should be used to close the output gap?

Answer: (circle the correct answer)                                                                                             

Contractionary fiscal policy     Expansionary fiscal policy

7. Refer to the graph in part a):

Suppose the economy is currently at point A. Which of the following would close this output gap?

Answer: (circle the correct answer)                                                                                            

A decrease in the nominal interest rate     An increase in the nominal interest rate

8. Refer to the graph in part a):

Suppose the economy is currently at point B. Which of the following would close this output gap?

Answer: (circle the correct answer)                                                                                             

A decrease in the nominal interest rate     An increase in the nominal interest rate

1. Refer to your answer in part g):

How exactly would the answer that you chose in g) help eliminate the output gap? (hint: think of which components of AD would be affected and how). Explain.

Answer:

10. Sketch the Short Run Phillips curve. Label both axes.

Next, on this Phillips curve show where point A from your graph in part a) would be.

Then, on the same Phillips curve show where point B from your graph in part b) would be.

Answer:

Answer 1