Question

6. Demonstrate the decrease in wealth using the closed AD-AS model, ceteris paribus, in both the short-run and long-run. Assumptions: (1) start in long-run equilibrium; (2) prices are sticky; (3) nominal wages are fixed in the short-run. [Note: this is the self-correcting version.]

[Sub-questions 6-10 are connected.]

In the short-run, _______ shifts _______.

A. the aggregate demand curve; leftward

B. the aggregate demand curve; rightward

C. the short-run aggregate supply curve; leftward

D. the short-run aggregate supply curve; rightward

E. the long-run aggregate supply curve; leftward

F. the long-run aggregate supply curve; rightward

G. both the short-run aggregate supply curve and long-run aggregate supply curve; leftward

H. both the short-run aggregate supply curve and long-run aggregate supply curve; rightward

7. The short-run equilibrium results in a _______ price level, a _______ real GDP, indicating a _______.

A. lower; lower; recessionary gap

B. lower; higher; recessionary gap

C. higher; lower; recessionary gap

D. higher; higher; recessionary gap

E. lower; lower; inflationary gap

F. lower; higher; inflationary gap

G. higher; lower; inflationary gap

H. higher; higher; inflationary gap

8. As a consequence, the labor market is _______ as there are more _______ than _______.

A. slack; workers; jobs available

B. tight; workers; jobs available

C. slack; jobs available; workers

D. tight; jobs available; workers

9. In the long-run, nominal wages will _______, thereby _______ producer's _______.

A. decrease; lowering; input prices

B. decrease; lowering; technology

C. decrease; raising; input prices

D. decrease; raising; technology

E. increase; lowering; input prices

F. increase; lowering; technology

G. increase; raising; input prices

H. increase; raising; technology

10. The _______ shifts _______ resulting in a _______ price level and _______ real GDP, compared to their initial levels.

A. short-run aggregate supply curve; leftward; higher; an unchanged

B. short-run aggregate supply curve; leftward; lower; an unchanged

C. short-run aggregate supply curve; rightward; higher; an unchanged

D. short-run aggregate supply curve; rightward; lower; an unchanged

E. long-run aggregate supply curve; leftward; higher; an unchanged

F. long-run aggregate supply curve; rightward; lower; an unchanged

G. short-run aggregate supply curve; rightward; lower; higher

H. short-run aggregate supply curve; rightward; lower; lower

Answer 1

Economy begins at A at its long run equilibrium level. A decrease in wealth is a demand shock that shifts the AD down. Prices are sticky in the short run so SRAS is upward sloping. Economy moves to B where output is reduced resulting in a recessionary gap and the price level also declines. In the long run as prices and wages adjust, economy moves to C where price level falls and real GDP reaches its full employment level

6) Option A

7) Option A

8) Option A

9) Option A

10) Option D

Prica LRAS As ' A'S' ~ , AD A'D' Yi Yf Output