For the next three questions, use the graph, above, which shows the aggregate de
ID: 1124836 • Letter: F
Question
For the next three questions, use the graph, above, which shows the aggregate demand (AD), the short run aggregate supply (AS-sr) and the long run aggregate supply (AS-lr) for an economy:
12. Suppose that the Fed tries to stimulate the economy so that equilibrium income/output rises to a level above Q*. Which of the points above would be consistent with a new short run equilibrium?
a. Point A.
b. Point B.
c. Point C.
d. Point D.
e. None of the above.
13. Suppose that the Fed tries to stimulate the economy so that equilibrium income/output rises to a level above Q* and that economic agents do not suffer from money illusion nor is there a lag in adjusting wage levels to price changes. Which of the points above would be consistent with a new short run equilibrium?
a. Point A.
b. Point B.
c. Point C.
d. Point D.
e. None of the above.
14. Suppose that the Fed has been trying to stimulate the economy so that equilibrium income/output rises to a level above Q* but it has stopped this policy. Meanwhile, economic agents have factored this policy into their decision-making and continue to do so. Which of the points above would be consistent with a new short run equilibrium?
a. Point A.
b. Point B.
c. Point C.
d. Point D.
e. None of the above.
Explanation / Answer
12. Suppose that the Fed tries to stimulate the economy so that equilibrium income /output rises to a level above Q*. Then point C would be consistent with a new short run. Because When fed tries to stimulate the economy, it can do this by increasing the money supply that this is turn will shift the aggregate demand curve to the right . So, now, in the short run, ne equilibrium level will be at point C.
13. Suppose that the Fed tries to stimulate the economy so that equilibrium income/output rises to a level above Q* and that economic agens do not suffer from money illusion nor is there a lag in adjusting wage levels to price changes. Point B is consistent with a new short run equilibrium.
14. Suppose that the Fed has been trying to stimulate the economy so that equilibrium income/output rises to a level above Q* but but it has stopped this policy . Meanwhile , economic agents have factored this policy into their decision making and continue to do so. Point A is consistent with a nw short run equilibrium.