Ch. 31: AD/AS Graphing Practice: Key

a.Begin in long run equilibrium b.Government increased military spending. Show and identify results for P level and GDP. = G goes up = AD shifts right = PL up and GDP up = Inflationary gap What about income and employment? c. What happens to nominal wages in the short run? = Nominal Wages don’t respond in short run Yf #1

d. What happens to real wages in the short run? = as PL rises and Nom Wages are sticky, Real Wages decrease e. What will happen to nominal wages in the long run? = as PL and output continue to rise, Nom Wages eventually rise as well Yf

f.Explain and show what happens as a result of part e. = All input P have increased and now W increase = Shift Short Run AS left g. Identify the final results for P level and GDP. = higher P but back at Yf and increase in Nominal W are offset by increase in P level Yf

a. Draw and label a graph for the macro economy in long run equilibrium. b. Consumer confidence about the economy is down. Show and identify results for P level and GDP. = PL decrease, GDP decrease (below full employment levels) = Recessionary Gap What about income and employment? c. What happens to nominal wages in the short run? = As GDP and PL fall, Nominal Wages are sticky and don’t respond in short run Yf #2

a. What happens to real wages in the short run? = as PL falls and Nom Wages stuck, Real wages rise e. What will happen to nominal wages in the long run? = As the Long Run nears, Nominal W begin to decrease f. Explain and show what happens as a result of part e. = All input P have decreased and now W decrease = shift Short Run AS right g. Identify the final results for P level and GDP. = lower P level but back at Yf, and decrease in Nominal W are offset by lower P levels Yf