# ProblemSet4-solutions.pdf - Problem Set#4-solutions ECON...

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Problem Set #4-solutionsECON 1011.Why does the Short Run Aggregate Supply curve slope upwards while in the Long-RunAggregate Supply is perfectly inelastic.
2.Assume we start in LR equilibrium. Suppose we see the consumer confidence index rise.Use our Aggregate Supply/Aggregate Demand model to discuss the following.A.Would this event affect AD, SRAS, or LRAS? How and Why? Show this on an AD/ASgraphPLRAS_0SRAS_0AD_0AD_1Y_pY_1SRAS_1
B.Would this create an output gap? If so, what kind? Label this on your graph.
C.How could the market self-correct to get back into LR equilibrium? Show this onyour graph.
3.Consider a new deposit to the US banking system of \$1000. Suppose that all banks have adesired reserve ratio of 20%. The following table shows how deposits, reserves, and loansenable the creation of money.Complete the table below.RealGDPPLRAS_0SRAS_0AD_0AD_1Y_pY_1SRAS_1
RoundChange inDepositsChange inReservesChange in LoansFirst\$1000\$200\$800Second\$800800*0.2=\$160800-160=\$640Third\$640640*0.2=\$128640-128=\$512Fourth\$512512*0.2=\$102.4512-102.4=\$409.6Fifth\$409.60409.6*0.2=\$81.92409.6-81.92=\$327.68A.After 5 rounds, what is the total change in deposits as a result of the single NEWdeposit?(add together first column) \$1000+\$800+\$640+\$512+\$409.60=\$3,361.60
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