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final example - 2:ch uoz{12 Pm“ flwmgrz WV Wm V/T F V/T...

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Unformatted text preview: 2:ch uoz {12/ Pm“! flwmgrz WV, Wm V/T F V/T 61 {I} (”j I 121 (A? 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. The explanations for the slopes of the aggregate demand and aggregate supply curves are the same as the explanations for the slope of demand and supply curves for specific goods and services. Technological progress shifts the long—run aggregate supply curve to the right. Increased uncertainty and pessimism about the future of the economy decreases investment spending shifting aggregate demand to the left. In response to a decrease in output the economy would revert to its original level of prices and output whether the decrease in output was caused by a decrease in aggregate demand or a decrease in aggregate supply. Economists mostly agree that the Great Depression was the result of a very large adverse supply shock. If the government increased the money supply in response to a decrease in aggregate supply, unemployment would return towards its natural rate, but prices would rise even more. A recession has no benefit to society——it represents a sheer waste of resources. Most economists agree that stabilization policy is likely to work despite lags in the effects of policy. The cost of inflation reduction is a small but permanent increase in unemployment The federal government has committed to eliminate federal public debt by 2021. Short-Answer Questions (24 points) Answer in. the Space provided. 82. (4 points) Explain why sustained government deficits are likely to lead to lower living standards in the long run. You may want to use a diagram. . . P 7 .. ' . . 5.55 if A. . . .i '5 A“; (M. 01.55 6‘ :1 flair} {- WM} f? fig: M€5 > / g h ' . 51‘; {RE €515.55" $5.3 #MNMX :17.) Ag; 5M 315%» O X 83. (lfi points) Suppose that the economy is in a long-run equilibrium. a. Use a diagram to illustrate the state of the economy. Be sure to show aggregate demand, short-run aggregate supply and long-run aggregate supply. P LRM. b. Now, suppose that firms become pessimistic about future business conditions and significantly cut their capital investments. Use your diagram to show what happens to output and the price level in the short run. What happens to the unemployment rate? ”AD (ant/“6. 4hera £27? 1:? \l/ y WA XL P "” U WW‘GP azémflfi ¢ «E Law” 5 y d}! c. Assuming no change in policy, what would happen to output, employment and the price level in the long-run? Explain. (For now, assume that there is no change in the long—run aggregate supply curve). Bag ray/:15: (.22? héfjww 2...? Aka-«WE?Egaigmmtjgl/ MOM/(Mr?! w M” ‘L’ k f if (I 64} tau 61:} 3’”) JJ {an (‘9‘; nix} P 11:: f} {Mpg} “at???“ ‘41:? 3;}; :2) EPAIQ ‘ m 6:4 EM: " t e e} w a [14-12; t a; N‘» w? AS «Cu/um. (MON ah? mwgét fa» ”Hg; 6 V 17 t) i w a3 6"ng "i? 3%:in W WE E E EEEQE d. Is there anything the government could do in the short—run to soften the impact on the economy? Explain. @ r» We and am U Mcpm... 5 @5554]! E55555 MJ/gm ”E” BMEtEE’ d {(2% 6L“ Er»; 55:“; 554,55 MW 5555 W65“ {:5 e3£tk5,. E} E‘ 555555 Mm EEE £5555 1,56%}? 555/3 mjl Pfi/ éwE: {553*} {555% ME EE‘EQEE 534% E ’étaéatee-NJW mat; mtmEv {WE {E .559 {512555454 gkmmzw?‘ fl fimtfi égEMéE/ AEEEEEgEEEE e. How might the drop in capital investment affect the long—run aggregate supply curve? E350? m ”@965? gatwemm/{E 3 J” WE ’5) g) L- r2 {I} g 6 {15¢} {E w é»: 7;} £1 £5: E} jig?! 5 14 84. (5 points) In the 19705 people had become accustomed to high inflation. In 1979, the Bank of Canada decided to fight inflation and decreased the money supply growth rates. Many people thought that the Bank of Canada‘ 3 action would cause a recession. a. Is this thinking consistent with the aggregate demand and aggregate supply model? Explain. L/Ur} , _ 1’ b. According to the sticky wage theory what should have happened to output if people had believed the Bank of Canada’s commitment to reduce the inflation rate and had perfectly anticipated the drop 1n prices. Explain. a} peafilfi A“: {Jae/111 11.11145ng “5111! ft 5111(1) MDNw/M 51111111111151. A411.” [.11 3111411116111 25* a A Qféwfi 1"" WWW if} Q}, if “7: a g a Xlxéfid A117,; @1111 3» A @914;me 9116611! mtéfif wit/UL Wflg‘m foggy, ’5’?! gage - M111 fitt/‘M 51% vai m MtMiz‘m: 15 85. (5 points) On April 22, the Bank of Canada will announce Whether it inc1eases, dec1eases or does not change the bank rate. What do you expect the announcement to be? Explain (you . may want to use diagrams). ”V a a; Mai; @1111? ‘3 1 1 USQQLCa’MW 1/) fl/‘pmggmg #Vbfid "2) J/ ”X "(Mfg 5,4,”, 41:} is: g” Wfim/ a?” Flaw-f“ > (J/CE/ J1: , ,, 1,;1/ TA”) “Qiafméfi ”W?”””””” % ””5: ”9 ga/:/11fi” 1”” ”0/ /(P”” figyifw) j é ggflfir {at £19m” m 1 , 1; ”if“? ”‘1; é” ”” ”AWMEJfi (”r l6 ...
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