Question

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. 

• The size of the labor force 

• The inflation rate 

• The price level 

• The level of technological knowledge 

Suppose the economy produces real GDP of $30 billion when unemployment is at its natural rate. 

Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph.

 Suppose the government passes a law that reduces unemployment benefits in a way that causes unemployed workers to seek out new jobs more quickly. The policy will cause the natural rate of unemployment to _______  which will 

• Not affect the long-run aggregate supply curve 

• Shift the long-run aggregate supply curve to the right 

• Shift the long-run aggregate supply curve to the left 

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. 

The government allows more immigration of working-age adults who find work. 

This economy's primary source of foreign oil decides to cease exports for political reasons. 

An investment tax credit increases the rate at which firms acquire machinery and equipment. 

Answer 1

Q1) The correct option is: price level

In the long run, neutrality of money holds, thus an increase in the growth rate of money supply in the short run will not have real effects. Inflation rate will be constant in the long run due to monetary neutrality. However, due to an increase in the growth rate of money supply, the price level increases without any effect to real variables. The price level increases but the growth rate of price remains constant in the long run.

Q2) The correct option is: shift the long run aggregate supply curve to the right

Long run AS curve shifts due to:

-Higher productivity of labour and capital

-Increased labour market participation (growing labour supply)

-Demand and supply-side gains from innovation and enterprise

-Capital investment

Since the unemployed labour is entering the labour market, the supply of labour is increasing. That enhances productive capacity of the economy. Thus, the curve shifts to the right.

Q3)

a) right: because labour supply is increasing

b) no shift: import of foreign oil does not classify as capital dis/investment; it is an expenditure

c) right: greater investmentin capital increases productive capacity of the economy