Transcript 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 (Y1)
• Current equilibrium price level (P1)
• Long-run aggregate supply
LRAS
Price Level
SRAS
P1
AD
YF Y1
Real GDP
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)
LRAS
Price Level
SRAS
P2
P1
AD
YF Y1 Y2
AD2
Real GDP
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?
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.