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Ch. 31: AD/AS Graphing Practice: Key

Ch. 31: AD/AS Graphing Practice: Key. #1. Begin in long run equilibrium Government increased military spending. Show and identify results for P level and GDP. = G goes up = AD shifts right = PL up and GDP up = Inflationary gap What about income and employment?

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Ch. 31: AD/AS Graphing Practice: Key

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  1. Ch. 31: AD/AS Graphing Practice: Key

  2. #1 • Begin in long run equilibrium • Government increased military spending. Show and identify results for P level and GDP. = G goes up = AD shifts right = PL up and GDP up = Inflationary gap What about income and employment? c. What happens to nominal wages in the short run? = Nominal Wages don’t respond in short run Yf

  3. d. What happens to real wages in the short run? = as PL rises and Nom Wages are sticky, Real Wages decrease e. What will happen to nominal wages in the long run? = as PL and output continue to rise, Nom Wages eventually rise as well Yf

  4. Explain and show what happens as a result of part e. = All input P have increased and now W increase = Shift Short Run AS left g. Identify the final results for P level and GDP. = higher P but back at Yf and increase in Nominal W are offset by increase in P level Yf

  5. #2 a. Draw and label a graph for the macro economy in long run equilibrium. b. Consumer confidence about the economy is down . Show and identify results for P level and GDP. = PL decrease, GDP decrease (below full employment levels) = Recessionary Gap What about income and employment? c. What happens to nominal wages in the short run? = As GDP and PL fall , Nominal Wages are sticky and don’t respond in short run Yf

  6. a. What happens to real wages in the short run? = as PL falls and Nom Wages stuck, Real wages rise e. What will happen to nominal wages in the long run? = As the Long Run nears, Nominal W begin to decrease f. Explain and show what happens as a result of part e. = All input P have decreased and now W decrease = shift Short Run AS right g. Identify the final results for P level and GDP. = lower P level but back at Yf, and decrease in Nominal W are offset by lower P levels Yf

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