1. For the following situations, which curve(s) (AD, SRAS and/or LRAS) shift and in which direction. Explain, your answers (since you may be thinking something that can be considered correct that I wasn't considering)
a. Consumers feel optimistic about the economy and increase their spending.
b. Iran shuts down the Straight of Hormuz and causes the price of petroleum to increase.
c. Ilurricanes Katrina and Hugo destroy significant infrastructure along the Gulf coast.
2. Actions of the Federal Reserve and their consequences.
a. if the Federal Reserve sells bonds, show what happens in the money market by drawing a graph with the Interest rate on the vertical axis and the quantity of money on the horizontal axis.
b. What happens to the equilibrium interest rate?
c. Which curve (in the AD-AS) model don this shift, and in which direction?
d. Why did that claw shift (what changes)?
3. Suppose the economy was initially in long run equilibrium before a negative supply shock occurred the SRAS curve shifts to the left.a. Draw a graph and label the original AD, SEAS sad LRAS curves with the economy originally In long run equilibrium. Also draw and label the new SRAS curve. Label the old equilibrium and the new equilibrium on the graph. What happens to unemployment and inflation?
b. Assuming that the government does not intervene, illustrate how the economy returns to long run equilibrium Describe the mechanism that moves the economy hack to the long-run equilibrium. Now does the unemployment rate and the price level compare to the initial long-run equilibrium?
c. Now assume the government does intervene- by increasing Government spending and brings- the economy back into long run equilibriums. Draw a, new graph to illustrate this situation. How does the unemployment rate and the price Level compare to the initial long-run equilibrium?
d. Discuss the tradeoff between unemployment and inflation.
4. Briefly discuss two automatic stabilizers and what how might have affected the economy in the event in question (the negative supply shock)
5, Suppose the government is deciding upon their upcoming policy. Explain why the shape of the aggregate Supply curve necessitates a tradeoff between unemployment and inflation such a tradeoff In the long run? Why isn't there such a tradeoff in the long run.