Question

1.Suppose home prices and stock prices plummet, while bank failures dramatically inhibit planned investment spending. Use the AD/SRAS diagram to predict the impact on the equilibrium price level and the level of real GDP.

1.The Price level and GDP both fall.

2The Price level and GDP both rise

3.The Price level falls and GDP stays the same.

4.The Price level rises and GDP stays the falls.

2. An inflationary output gap exists when...

1.Actual GDP is below potential GDP and the unemployment rate is below the natural rate.

2.Actual GDP is above potential GDP and the unemployment rate is below the natural rate.

3.Actual GDP is equal to potential GDP and the unemployment rate is equal to the natural rate.

4.Actual GDP is abovel to potential GDP and the unemployment rate is above the natural rate.

3. The spread of COVID-19 has both decreased stock values and induced many American workers to stay home. How can we model the short-run impacts of this situation?

1.A leftward shift of the AD and SRAS curves, since household wealth has declined and workers are now less productive.

2.A leftward shift of the AD curve and a rightward shift of the SRAS curve. Household wealth has declined, but the Virus reduced nominal wages.

3.A leftward shift of the AD, SRAS, and LRAS curves, since household wealth has declined, workers are now PERMANENTLY less productive.

4.An increase in AD, SRAS and LRAS, since the Corona Virus makes us all more productive.

Answer 1

a) "A"

This will shift the AD curve to the left and both the price level and GDP will fall.

b) "B"

Actual GDP is above potential GDP and the unemployment rate is below the natural rate.

c)"A"

A leftward shift of the AD and SRAS curves, since household wealth has declined and workers are now less productive.