Consider an economy with a flexible exchange rate that is initially in equilibrium.
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On a graph, draw the aggregate demand curve, as well as the short and long run aggregate supply curves. Label these curves AD1, SRAS1, and LRAS1. Label the initial equilibrium P1 and Y1.
Suppose a sudden and dramatic decrease in the price of a critical imported intermediate good (such as oil) occurs. How does this affect the AD curve? Draw the new curve, labeling it AD2.
How does the change described in part b affect the long and short run aggregate supply curves? Draw the new curves, labeling them SRAS2 and LRAS2.
Label the new long run equilibrium levels of Y and P as Y2 and P2.
This problem involves the effects of contractionary monetary policy under a flexible exchange rate regime.
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On a graph, draw the aggregate demand curve, as well as the short and long run aggregate supply curves. Label these curves AD1, SRAS1, and LRAS. Label the initial equilibrium P1 and Y1.
Suppose the central bank decides to reduce the money supply in order to lower inflation. How does this affect the AD curve? Draw the new curve, labeling it AD2.
How does the change described in part b affect the short run aggregate supply curve? Draw the new curve, labeling it SRAS2.
Label the new long run equilibrium levels of Y and P as Y3 and P32.
This problem involves the effects of contractionary fiscal policy under a fixed exchange rate regime.
Graph the following curves by clicking here
On a graph, draw the aggregate demand curve, as well as the short and long run aggregate supply curves. Label these curves AD1, SRAS1, and LRAS1. Label the initial equilibrium P1 and Y1.
Suppose government spending is reduced in an effort to reduce a budget deficit. How does this affect the AD curve? Draw the new curve, labeling it AD2.
How does the change described in part b affect the short run aggregate supply curve? Draw the new curve, labeling it SRAS2.
Label the new long run equilibrium levels of Y and P as Y2 and P2.
