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Quiz4AAnswerkey - ECON 420-002 004 Fall 2008 Quiz 4A On my...

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Quiz 4A On my honor, I have neither given nor received unauthorized aid on this quiz: ______________ Name:___________________________________________ Section: _______________ 1. Let us say that monetary authorities increase money supply by 10%. a. What is the effect of this on output and price level in the short run? Long run? Use the AD- AS model to explain.(6 points) AD curve will shift to the right. In the short run, with prices fixed, there will be no change in it. The economy will move from point A to point B and output will increase by 10%. In the long run, when prices adjust fully to this increase in AD, output will return to potential GDP while price level will increase by 10% to P 1. The new equilibrium will be at point C. LRAS P 1 C P 0 A B SRAS AD 1 AD 0 Y* Y 1 b. What will happen to unemployment rate in the short run? Long run? (2 points) Unemployment will decrease by 5% (10%/2) in the short run but will return to it’s natural rate in the long run. 1
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This note was uploaded on 11/17/2008 for the course ECON 420 taught by Professor Hill during the Spring '08 term at UNC.

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Quiz4AAnswerkey - ECON 420-002 004 Fall 2008 Quiz 4A On my...

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