Key for Problem set 6 Spring 2007

Key for Problem set 6 Spring 2007 - Economics 100 Key for...

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Economics 100 – Key for Problem Set #6 Spring 2007 Page 1 of 3 Questions 1-7 examine the predictions of the inflation adjustment and aggregate supply model of chapter 15. Suppose that the U.S. economy is at an original equilibrium with real GDP = 12,000; equilibrium inflation = 3.0%; and potential real GDP Y * = 12,000. Suddenly, consumer spending rises by 1,000 so that the AD curve shifts to the right by 1,000. (Questions 1, 3, 5, 6 and 7 are worth 1 point each; questions 4, 9 and 11 are worth 2 points each; and questions 2, 8 and 10 are worth 3 points each for a total of 20 points) Real GDP ( Y ) inflation rate ( π ) LRAS SRAS 13,000 12,000 AD 3.0% 4.0% AD’ 1 5 1. See the above diagram. 2. The new short-run equilibrium has real GDP = 13,000; inflation rate = 3.0% and potential real GDP = 12,000.
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Economics 100 – Key for Problem Set #6 Spring 2007 Page 2 of 3 3. Using your answer to question 2, the output gap relative to potential is * * 12,000 13,000 0.083 12,000 YY Y −− == . A negative output gap means that the economy is producing above full-employment.
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Key for Problem set 6 Spring 2007 - Economics 100 Key for...

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