Question

Draw (and Label) a basic short run aggregate supply (SRAS), aggregate demand (AD) and long-run aggregate supply curve (LRAS) showing the economy at the long-run equilibrium. [2.0]

2. Using SRAS-AD-LRAS framework, explain (both text and graph) how each of the following events would affect the aggregate demand curve. Also, indicate the effect on price level, unemployment, interest rate and real GDP. Label your initial equilibrium with PL and Y and new equilibrium with PL_n and Y_n [Assume the economy is at the long run equilibrium & write a new graph for each question]. [4.0]

a. An increase in the price level.

b. An increase in the real interest rate.

c. Appreciation of domestic currency.

d. Higher state income taxes.

Answer 1