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# MID2 - Practice Midterm 2 QUESTIONS 1 Answer all of the...

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Practice Midterm 2

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1102-­૒032 Fall 2010 Midterm 2 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: Nominal wages: Output: Unemployment: 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: Nominal wages: Output: Unemployment: c. Suppose the government increases taxes to pay for the increased government spending. What happens to prices, wages, output and unemployment compared to the initial equilibrium? Overall price: Nominal wages: Output: Unemployment: 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.
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