problem_set_3(nicks) - e) There is a boom in the economy....

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Nick Poggetti Economics 2 Problem Set 3 1. Explain what happens to the inflation-adjustment line in the long run (whether it shifts up or down) in each of the following cases. a) The economy sinks into a recession. The IA shifts down. The IA keeps shifting down until real GDP is back to potential GDP. b) Firms expect the Fed will adjust monetary policy and allow inflation to rise from 2 percent to 4 percent. An increase in inflation is expected so it will shift up. c) OPEC (Organization of Petroleum exporting countries) successfully doubles the price of oil in the market. Since oil is a raw material, the IA line will up. d) Congress cuts taxes. The IA line will shift up because the deacrease in taxes in taxes will cause aggregate demand to rise, and in order for real GDP to equal potential GDP, the IA line will need to rise.
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Unformatted text preview: e) There is a boom in the economy. The IA line will shift up real GDP=potential 2. Suppose the economy is initially at potential GDP. a. Draw an aggregate-demand curve and inflation-adjustment line, and label the initial equilibrium with an A . b. Suppose there is a change in monetary policy that aims to increase the rate of inflation (from the current rate). Illustrate the short-run effect on your diagram. Label the new equilibrium with a B . c. Illustrate the medium-run effect of the change on your diagram, and label the medium-run equilibrium with a C . d. Illustrate the long-run effect of the change on your diagram, and label the long-run equilibrium with a D. e. Is the rate of inflation at point D higher or lower than at point A?...
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This note was uploaded on 02/13/2012 for the course ECON 2 taught by Professor Staff during the Fall '10 term at Santa Clara.

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