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Use an aggregate demand (AD) and aggregate supply (AS) model in which the short run aggregate supply curve slopes upwards to illustrate the equilibrium level of real GDP and prices if the economy is operating:
a. Graph three cases
b. In each case explain the relationship between real GDP and potential GDP.
c. If the economy were below full employment in the short run, would it adjust (self adjusting mechanism - no deliberate fiscal or monetary policy) to full employment and potential output over time?
d. Explain and illustrate the adjustment from short to long run in (c) in your AD/AS diagram.
e. If the economy is not self-adjusting but a deliberate monetary policy is proposed to remove the output gap, how this process would be different than self-adjusting mechanism i.e. what curve or curves would shift and why? What would be after adjustment impact on the price level and output?
Discuss the feasibility of lower middle or low income countries resorting to fiscal stimulus to stave off recessions in their own economies. You can use one or more countries as examples.
Those who advocate that the Federal Reserve target monetary aggregates usually argue that the Fed should not alter its monetary targets in response to temporary changes in macroeconomic conditions
Find the following: First solve this problem using an Excel spreadsheet approach and then do the problem using the optimization procedure; compare the answers for the two methods.
Discuss the limitations of this model as an explanation of the effects of government expenditure on GDP.
Consider a product with a supply function Q 1 = β 0 + β 1 + u 1, a demand function Q d i =y 0 +u i d . Show that P i and u s d are correlated.
With the help of an AD-AS diagram, explain the effect on the price level and real GDP. Use an upward sloping AS curve and be clear about the interconnections among markets.
Plot the wage- setting and price setting equation or a property labelled graph and identity the nature rate of unemployment.
Graphically illustrate the impact of an open-market purchase by the Federal Reserve on the equilibrium interest rate using the theory of liquidity preference and the market for real money balances. (Be sure to label:
Answer whether the following statements are true or false, explaining your answer in each case.
What are the FC, ATC, AFC, AVC and MC at these output levels?
Find the optimal (profit maximizing or cost minimizing) output of each firm. Find the price that each firm charges at the when producing the optimal output.
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