Review Problems Modules 18-19

Changes in Short Run Equilibrium For the each event indicate whether AD or SRAS would change and in what direction. Also indicate changes in aggregate output and aggregate price level 1.Most recent jobs report indicates an improving economic situation in A copper shortage sends prices soaring

Changes in Short Run Equilibrium 3.Increasing prices throughout the economy spark fears of inflation 4.The Federal Reserve sells bonds to increase interest rates. 5.New “smart” robots dramatically cut manufacturing times for a range of goods.

Sketch and Explain 6.Sketch short-run macroeconomic equilibrium 7.Next, on the same graph illustrate a situation where the above short-run macroeconomic equilibrium results in an inflationary gap. 8.Describe what would happen “naturally” that would result in long-run macroeconomic equilibrium and what would happen to the price level.

Example As a result of rising nominal wages, the SRAS curve will shift left and there will be a new long-run equilibrium at a higher price level LRAS SRAS AD Real GDP Agg. Price Leve l E P1P1 Y1Y1 SRAS 2 E2E2 YPYP

Example 1.Short run equilibrium? 2.Long run equilibrium? 3.What kind of gap? 4.If Y 1 = 160 and Y P = 200 what is the output gap? 5.What will happen over time? LRAS SRAS AD Real GDP Agg. Price Leve l E P1P1 Y1Y1 YPYP