PS4_Econ314_Solution-1 - below, explain the long-run...

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Professor: Henry Y. Wan, Jr. Spring 2008 TA: Yu Zhang Econ 314 Problem Set 4 (due on Mar.28 in TA section) Essay Questions 1. Suppose the economy is initially in long-run equilibrium. For each of the shocks listed below, explain the short-run effects on output and the price level. (a) A stock market crash reduces consumers’ wealth. (b) Businesses decide to hold larger inventories. (c) The government cuts defense spending. (d) Foreign countries buy more U.S. goods. Answers: (a) Output declines and the price level is unchanged. (b) Output rises and the price level is unchanged. (c) Output declines and the price level is unchanged. (d) Output rises and the price level is unchanged. 2. Suppose the economy is initially in long-run equilibrium. For each of the shocks listed
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Unformatted text preview: below, explain the long-run effects on output and the price level. (a) Labor supply decreases. (b) Productivity increases. Answers: (a) Output declines and the price level rises. (b) Output rises and the price level falls. 3. For each outcome below, tell what type of shift must have taken place in either the aggregate demand curve or the long-run aggregate supply curve. (a) In the short run, the price level is unchanged and output rises. (b) In the long run, the price level declines and output is unchanged. (c) In the long run, the price level rises and output declines. Answers: (a) The aggregate demand curve shifts to the right. (b) The aggregate demand curve shifts to the left. (c) The long-run aggregate supply curve shifts to the left....
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This note was uploaded on 09/30/2008 for the course ECON 3140 taught by Professor Mbiekop during the Spring '07 term at Cornell University (Engineering School).

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