ECN101 Intermediate Macroeconomics Winter2009Professor E.A.FrenkelHomework 10– Solutions(1) Your economy is running at less than full employment equilibrium. You decide to increase the money supply to raise the level of income. What happens immediately on your diagram as "M" rises? What might happen next to the price expectations that suppliers factor into their supply decisions? What happens on the diagram once price expectations change? Was your decision to increase the money supply successful? There is no one right answer here, just the right logic and you work through your scenario.
(2) Your economy is at full employment equilibrium. A supply shock hits the economy and this raises the expectations that the future price level will be higher than it is at present. What happens to employment and what can you do to protect it?BP3P1CAD2Pricelevel, PY1±AOutput,YAD1SRAS1LRASSRAS2Figure 1P2