MID2 ANSWER KEYS

MID2 ANSWER KEYS - Practice Midterm 2 QUESTIONS 1 Answer...

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Practice Midterm 2
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Page 2 of 7 QUESTIONS 1 Answer all of the following questions Must show equations and values used for full credit. No work=no points, even if the answer is correct. 1. Suppose the government increases its spending on maintaining its parks and national monuments. a. In the short run, what happens to prices, wages, output, and unemployment? Overall price: Increases Nominal wages: Stays the same Output: Increases Unemployment: Decreases b. In the long run, what happens to output prices, wages, output, and unemployment if the government and the central bank don’t change anything else? (compared to the original equilibrium) Overall price: Increases Nominal wages: Increases Output: Stays the same Unemployment: Stays the same c. Suppose the government increases taxes to pay for the increased government spending. What happens to P, W, output and unemployment compared to the initial equilibrium? Overall price: Stays the same Nominal wages: Stays the same Output: Stays the same Unemployment: Stays the same d. (2 pts) Show the moves corresponding to a. and b. on the extended AD-AS diagram when the original situation is as indicated. Be sure to label each shift (with a or b) 2. In 2004, an underwater earthquake in the Indian Ocean generated a large tsunami. Explain how each of the following changes aggregate demand/ aggregate supply, and how it changes the price level in the short run. a. Damage to infrastructure: AS decreases, P increases b. Inflow of monetary aid: AD increases, P increases c. Inflow of goods aid (machinery etc.): AS increases, P decreases 3. Define Fiscal Policy: Changes in gov’t purchases and/or tax collections designed to achieve full employment and noninflationary domestic output Quantity Prices AD SRAS LRAS (b) (a)
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MID2 ANSWER KEYS - Practice Midterm 2 QUESTIONS 1 Answer...

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