Question

Question no 1

Consider the AD-AS model. Assume that the short run AS-curve (the SRAS-curve) is upward sloping (and therefore not perfectly horizontal). Assume that the economy is in a long run equilibrium, when government purchases suddenly increase. Assume that this change in government purchases was anticipated by the economic agents, and that they have rational expectations. As a result,

following are options tell me correct option

1. the aggregate price level becomes higher than expected in the short run, and then continues to increase until it eventually converges to a higher level than before the increase in government purchases.

2. the aggregate price level becomes higher than expected in the short run, but eventually converges back to the same level as before the increase in government purchases. 3.

the aggregate price level remains constant, both in the short and in the long run

. 4. the aggregate price level immediately increases to a higher level, and then remains constant at this higher level both in the short and in the long run.

quewtion no 2

Consider the AD-AS model with adaptive expectations. Assume that the economy is in a long run equilibrium, when government purchases suddenly increase. As a result,

1. aggregate production rises above its natural level in the short run, and converges in the long run to a level which is higher than before the increase in government purchases.

2. aggregate production rises above its natural level in the short run, but converges back to its natural level in the long run.

3. aggregate production remains at its natural level, both in the short and in the long run.

4. aggregate production remains at its natural level in the short run, but not in the long run

Answer 1

1) The answer is 2 -) 2. the aggregate price level becomes higher than expected in the short run, but eventually converges back to the same level as before the increase in government purchases.

because when the government purchases increases suddenly, as a result, the supply of money in the economy increases which decrease the interest rate, and increase in new business becuase investment increase, as a result the aggregate demand in the economy increase and thus aggregate price level increase but later in the long run, when the economy correct itself, the aggregate price level will reach to its original level where it was before the increase in governmnet purchaes.

2) The answer is 4-) . aggregate production remains at its natural level in the short run, but not in the long run