Download 10- Practice Free Respons Answers

QUESTION #1
1b)
Both Prices & Wages are sticky in the short run
which causes QTY supply to rise as inflation
1a)
LRAS1
Price
Level
SRAS1
Examples
• Price Level ↑ => nominal prices lag => QTY S ↑
•
P2
-----------------
P1
-----------
E2
E1
--------Y1
Price Level ↑ => nominal wages same but Real
Wages ↓ => So Qty Supplied 
AD2
AD1
Y*
Real
GDP
1c)
Actual Price level at (P1) is LOWER than
expected price level (which lags!)
Expected price level lags actual price level in
both directions
(actual price level is the one you are graphing => so if
AD shifts left => actual falls immediately…)
1d) Expansionary Fiscal Policy
G ↑ & C ↑ => AD ↑
↓ Taxes & ↑ Gov’t Spending
Back to long run equilibrium
QUESTION #1
1f) Tax cuts = less revenue for Gov’t
Government Spending ↑ => more $ going out
• Gov’t now running a BUDGET DEFICIT
1g) National Savings Falls
Supply Curve = National Savings = Sum of Public & Private Savings
• So Supply shifts left causing real interest rates to ↑
1h) Investment would fall (I↓) as interest rates rise
So AD shifts LEFT
3c)
Public savings rises (becomes less
negative) so National Savings ↑ 
QUESTION #2
3d) graph
So Loanable Funds Supply Shifts Right
Real
Interest
Rate
r2
S2
-------------- E1
------------------ E2
---------------------
R1
S1
Q1 Q2
3e)
AD ↑ as I ↑ (based only on loanable funds
market change)
Increase in Investment ( I↑ ) today
mean in the long run:
3f)
D1
Qty
Loanable Funds
PPF: Capital Investment shifts PPF to right
in long run
3a) Demand Curve = Investors (business)
SRAS & LRAS: both shift right as PPF
went right
Investors borrow money for capital goods (I) to
expand business…
UNEMPLOYMENT: r-GDP rises =>
unemployment rate must fall
3B) Rising Business confidence
Tax Credits for business investment
Both shift D right
QUESTION #3
LRAS1
Price
Level
SRAS1
LRAS2
SRAS2
P1
P2
-----------------
E1
-----------------
E2
AD1
Y1
Y2
Real
GDP