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Sample AD-AS Problem

Sample AD-AS Problem. The economy of Terrylandia is currently operating at an equilibrium above full employment. Draw a correctly labeled graph of aggregate and aggregate supply and show each of the following Current equilibrium output (Y 1 ) Current equilibrium price level (P 1 )

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Sample AD-AS Problem

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  1. Sample AD-AS Problem • The economy of Terrylandia is currently operating at an equilibrium above full employment. • Draw a correctly labeled graph of aggregate and aggregate supply and show each of the following • Current equilibrium output (Y1) • Current equilibrium price level (P1) • Long-run aggregate supply

  2. LRAS Price Level SRAS P1 AD YF Y1 Real GDP

  3. Sample AD-AS Problem (cont’d) • Now assume that the quantity of money in the economy increases and interest rates decrease. • Show on your graph in part (a) how this affects each of the following in the short run. • Real output (Y2) • Price level (P2)

  4. LRAS Price Level SRAS P2 P1 AD2 AD YF Y1 Y2 Real GDP

  5. Sample AD-AS Problem • Is the economy facing a recessionary gap, inflationary gap, neither, or both? • What fiscal policy measures could the government implement to bring the economy to output at full employment?

  6. Solution (cont’d) • The economy is facing an inflationary gap as actual aggregate output is greater than potential. • The government could cut government spending, increase taxes, or decrease government transfers.

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