Question

Question 9

a)

An increase in potential output in the AD-AS supply model will in the long run lead to what?

A. None of the other options

B. No change in output and an increase in inflation relative to the initial equilibrium

C. An increase in output and an increase in inflation relative to the initial equilibrium

D. A decrease in output and a decrease in inflation relative to the initial equilibrium

b)

Consider an AD-AS model with AD curve Y-Y*=-ay(n-*)+D and AS curve n=+B(Y-Y*)+s with parameter values a=1,y=1,=1,B=2, and with inflation target n*=0.03 and potential output normalised to Y*=1. Starting from a long-run equilibrium with ne=n*suppose there is a temporary supply shocks=0.06. Which of the following is FALSE?

A. In the short run,inflation is 5%

B. In the short run,output is 5%below potential

C. In the short run,the real interest rate rises

D. There is no long-run increase in inflation

c)

Use the following information about the closed economy to answer the question:GDP is$2000, Consumption is$1500,Government spending is $300, and Net taxes are$400.What is national saving?

A. $1100

B. $200

C. $500

D. $100

d)

Total production in the economy is described by the production function Yt=At*Kt^a*Lt^(1-a). Capital in use is equal to 25 units; labour in use is equal to 25 units; A is equal to 2 units; and a=0.5.If both capital and labour are increased to 50 units each,how much does the output increase?

A. from 25 to 50 units

B. from 50 units to 200 units

C. from 50 to 100 units

D. from 625 units to 2500 units

Answer 1

As per Chegg's policy 1st question has been solved.

As per AS- AD models when there is increase in potential output in the economy. Short run supply increases as there is more output which can be produced by labour. Therefore this leads to increase in output and assuming demand has not changed will result in fall in price. This has not been given in any option, therefore Option A is correct.

Option A. Correct, as others are wrong.

Option B. Incorrect, as output will increase and inflation is expected to fall or remain same.

Option C. Incorrect, output will rise but inflation is not expected to increase.

Option D. Incorrect, as output will increase.

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