unit 8 assignment

Question:

1. Using aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, explain the process and causes by which each of the following economic events will move the economy from one long-run macroeconomic equilibrium to another. In each case, explain the short-run and long-run effects on the aggregate price level and aggregate output.

a. There is a decrease in households’ wealth due to a decline in the stock market.

b. The government lowers taxes, leaving households with more disposable income, with no corresponding reduction in government purchases.

2. An economy in a hypothetical country is in long-run macroeconomic equilibrium when each of the following aggregate demand shocks occurs. What kind of gap—inflationary or recessionary—will the economy face after the shock, and what type of fiscal policies, giving specific examples, would help move the economy back to potential output?

a. A stock market boom increases the value of stocks held by households.

b. Anticipating the possibility of war, the government increases its purchases of military equipment.

c. The quantity of money in the economy declines and interest rates increase.