Use the following information for the next 7 questions. You should draw a graph that depicts the situation below and use your picture to answer the questions.
Assume that wages and prices are sticky and that we start at a long-run equilibrium. Assume that at this initial point, the growth rate of the money supply is 4%, the growth rate of the velocity of money is 9% and that the real economic growth rate is 5%.
Assume that there is a drop in consumption and investment such that it causes total spending growth to drop by 6%.
Assume now that the federal government is going to try and counter this drop in consumption and investment through fiscal policy by increasing government spending. Assume that that there is a multiplier and no crowding out. Assume the federal government gets its fiscal policy just right (including the multiplier).
1. What is the inflation rate at the initial long-run equilibrium (the point where we start)?
2. When consumption and investment fall, the _____ curve shifts _____.
3. After consumption and investment fall (and before federal government action), what is the inflation rate in your graph?
4. When the federal government decides to increase government spending, the ______ curve shifts ______.
5. After the increase in government spending, but before the multiplier kicks in, the AD curve is ______ the original AD curve.
6. After the multiplier kicks in, what is the growth rate of the money supply?
7. After the multiplier kicks in, what is the real economic growth rate?