Question

2. Use the model of aggregate demand and short-run aggregate supply to explain how each of the following would affect real GDP and the price level in the short run.

an increase in government purchases

a reduction in nominal wages

a major improvement in technology

a reduction in net exports

3. The United Kingdom (UK) held a national referendum (vote) on whether the UK should remain in the European Union (EU), or should exit the EU. Exiting the EU is likely to have several consequences: (1) increased barriers to trade between the UK and the remaining EU countries; (2) Reduced refugee flows.

Use the AS/AD model to describe the short run and long run effect of the UK exit from the EU.

Answer 1

2.

2. a) An p in Gout, punchases - AD increases E AD = (C+I+G+ NX) AD Curve shifts bightward Both equilibrium price level and Real GDP p. . price level a SRAS P2 T -AD2 ARGDP Y Y2

by A reduction in nominal wages decreases east of production SRAS p > ShAS Shifts sightward Equilibrium price level t and Real GDP parts of Roos SRASI price level SRASZ ADI - RGDP Y Y2

ļ and Y A major improvement in technology SRAS Shifts bightward > Equilibrium price level & and Real GDP 1. SRASI SRAS2 price plevel AD. Y Y IRGDP. both dy O reduction in NX - AD shifts leftward equilibrium price level and Real GDP t. •SRAS Price level K ADZ ADI Y2 YI RGDP