Question

1. (20 points) Use the aggregate demand and aggregate supply model to graphically discuss the short- run and long-run effects of the following events on the equilibrium output, unemployment, and inflation rate. LRAS AD Real GDP(Y) Suppose the economy is currently in the long-run equilibrium at point E. Start from point E to discuss the likely effects of the following events on the economy. Treat each case separately by drawing a separate diagram for each case. Congress passes legislation that establishes a tax incentives for all businesses that invest in new plant and equipment. Oil prices increase from current price of S60 per barrel to $90 per barrel. The Fed conducts an expansionary policy to increase economic activity Because of the continuing uncertainty in global economy consumer confidence drops by a large amount. a. b. c. d. e. With continuing economic crisis in Europe, investor increase their demand for U.S. dollar- denominated assets, resulting in appreciation of dollar against major world currencies.

Answer 1

LRAS short -un: . equilibnum ouutbut - increas 2 wnempleymentdeereaie LRAS SRAS GRAS -decrease Long-2u AD 2 Unemploment - decrease tb) en rale . LRAS S RAS shoyt rum LRAS SRAS L ps 2 unemplement- incrcase ation rate-incyease AD 2 Une mpleyment - decoeas

LSAS GEAS SRAL AD a beveca levet RAS AD Apf lesel