Quiz4B - ECON 420-002 & 004, Fall 2008 Quiz 4B On my...

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Quiz 4B On my honor, I have neither given nor received unauthorized aid on this quiz: ______________ Name:___________________________________________ Section: _______________ 1. Let us say that monetary authorities decrease money supply by 10%. a. What is the effect of this on output and price level in the short run? Long run? Use the AD- AS model to explain.(6 points) b. What will happen to unemployment rate in the short run? Long run? (2 points) AD curve will shift to the left. In the short run, with prices fixed, there will be no change in it. Output will fall by 10%. The economy will move from point A to point B and output will fall to Y 0 . In the long run, when prices adjust fully to this fall in AD, output will return to potential GDP while price level will fall by 10% to P 1. The new equilibrium will be at point C. LRAS P P 0 B A SRAS P 1 C AD 1 AD 0 Y 0 Y Unemployment will increase by 5% (10%/2) in the short run but will return to it’s natural rate in the long run. 1
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Quiz4B - ECON 420-002 & 004, Fall 2008 Quiz 4B On my...

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