ECO - 252 -- Macroeconomics
2. For each event a, b, and c below, use the AD-AS Model to answer the following 5 questions (in that exact order). Be neat! Do not clump all your answers together. If your answers are difficult to follow because of a messy layout, you will lose points even if your answers are correct.
1) Which curve in the AD-AS model shifts?
2) What is the direction of the shift (left or right)?
3) What are the short-run effects on output, the price level, and unemployment?
4) How will the economy get back to its long-run equilibrium if policy makers take no action? Be thorough!
5) What are the long-run effects on output and the price level?
a. Households decide to save a larger share of their income and to spend less on current consumption.
b. Crops suffer from a prolonged bad weather that promotes the spread of parasites on fruits and vegetables.
c. Europe experiences a huge economic boom.