Econ

EC 102

Chapter 14 Handout: Aggregate Demand and Aggregate Supply

For each of the following situations, indicate whether each of the listed variables increases (↑), decreases (↓), stays the same (0), or whether the impact on the variable is uncertain (?). In each case, assume that the economy in question initially starts at a long-run equilibrium.

1. Suppose that consumers expect inflation to increase in the near future. In the short run,

AD _____ AS _____ P _____ Y_____, and a (an) _______________ GDP gap is created.

If a GDP gap is created by this event, explain how the economy will “self correct” and return back to a long-run equilibrium. Is the final price level higher, lower, or the same as the initial price level (i.e. before the event occurred)?

2. Suppose that the exchange rate of the dollar increases relative to foreign currencies. In the short run,

AD _____ AS _____ P _____ Y_____, and a (an) _______________ GDP gap is created.

If a GDP gap is created by this event, explain how the economy will “self correct” and return back to a long-run equilibrium. Is the final price level higher, lower, or the same as the initial price level (i.e. before the event occurred)?

3. Suppose that the price of oil drops considerably. In the short run,

AD _____ AS _____ P _____...