Question

Question 1 has two parts: Give an example (real or fictional) of a news event that...

  1. Question 1 has two parts:
    1. Give an example (real or fictional) of a news event that would shift aggregate demand, ceteris paribus. In the interim between just before the event occuring to its final outcome (in the short run), describe what is happening to real GDP, the unemployment rate, and the inflation rate.  
    2. Give an example (real or fictional) of a news event that would shift the aggregate supply curve in the short-run, ceteris paribus. In the interim between just before the event occured to its final outcome, describe what is happening to real GDP, the unemployment rate, and the inflation rate in the short-run.
  2. Assume the economy has entered a recessionary gap, such that the current real GDP produced is below the economy's potential and that cyclical unemployment is positive. How will the economy recover back to its potential? Explain how your answer differs between the Keynesian perspective and the Neoclassical perspective. From each perspective, explain how active (if at all) the government should be in using policy tools to help the economy improve.
  3. Answer the thematic question of the module: How does the economy change over time?  Use the tools of the AD/AS model to explain key relationships between real GDP, unemployment, and the price level (inflation rate) as discussed in this module. Does it matter if our timeframe for analysis is the short-run or the long-run? Explain.

Homework Answers

Answer #1

Examples of events that will shift the aggregate demand curve to the right include exogenous increases in consumption, investment, and net exports, a decrease in the savings rate, an increase in the marginal propensity to consume, a decrease in the interest rate, and a decrease in the real exchange rate.

In the short-run, examples of events that shift the aggregate supply curve to the right include a decrease in wages, an increase in physical capital stock, or advancement of technology. The short-run curve shifts to the right the price level decreases and the GDP increases.

Growth and recession in the AD/AS model. We canexamine both long-term and short-term changes in gross domestic product, or GDP, using the AD/AS model. In anAD/AS diagram, long-run economic growth due to productivity increases over time is represented by a gradual rightward shift of aggregate supply.

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