Download Econ 102 Taskin Week of 20 February 2012

Econ 102
Taskin
The week of Nov 26, 2012
Econ 102
Bilkent University
Tutorial Activity Questions
1. Answer and review the following questions using graphs and
explanations.
1. Draw a basic aggregate demand and aggregate supply graph, with constant LRAS
that shows the economy in the long-run equilibrium.
a. Assume that there is large decrease in the exports of Turkey due to the
recession in Europe. Show the short-run equilibrium, and indicate what
happens to the level output, price and unemployment level? Explain how
does the economy adjust back to long-run equilibrium. Compared to the
initial equilibrium how have the values for each of the following variables,
real GDP, the price level, the unemployment rate, changed?
b. Assume that there is a sharp increase in the oil price level due to the
political upheaval in the Middle East region. Show the short-run
equilibrium, and indicate what happens to the level output, price and
unemployment level? Explain how does the economy adjust back to longrun equilibrium. Compared to the initial equilibrium how have the values
for each of the following variables, real GDP, the price level, the
unemployment rates, have changed?
2. Think about the following model where aggregate supply is given by
Y=250+25P
and the components of aggregate demand are
C=209+0.9YD-10P
G=250
T=10
X=100
IM=51+0.1YD
(a) Characterize the aggregate demand curve.
(b) Find the equilibrium GDP and price level.
(c) If potential GDP is 1500 is there a recessionary or inflationary gap? Is the labor
market in equilibrium? Find the long-run equilibrium values of Y and P and
describe the mechanism that will make the economy move from the short-run
equilibrium to the long-run equilibrium.
(d) If foreign demand on the domestic goods increases to 700, how much does the
AD curve shift to the right? How much do the (short-run) values of Y and P
change from their values in (b)? Why is/isn’t the change in Y the same as the
shift in aggregate demand?
(e) If the short-run equilibrium is as in (d), is there a recessionary or an inflationary
gap? Describe the mechanism that will make the economy move from the shortrun equilibrium to the long-run equilibrium.