AB 204 STUDY Extraordinary Success/ab204study.com AB 204 STUDY Extraordinary Success/ab204study.com | Page 13

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1. Refer to the sets of the aggregate demand, short-run aggregate
supply, and long-run aggregate supply curves. Use the graphs to
explain the process and steps by which each of the following
economic scenarios will shift the economy from one long-run
macroeconomic equilibrium to another equilibrium. Under each
scenario, elaborate the short-run and long-run effects of the shifts in
the aggregate demand and aggregate supply curves on the aggregate
price level and aggregate output (real GDP).
Suppose the household wealth decreases due to a decline in the stock
market asset prices (See the set of graphs below and pay attention to
the 3-stage shifts in graphs).
Assume the government lowers taxes, which increases the
household’s disposable income. However, the government purchases
(spending) remains the same. (See the set of graphs below and shifts
in graphs)
2. Suppose the economy of a hypothetical country has reached its
long-run macroeconomic equilibrium when each of the following
aggregate demand shocks occurs. What kind of gap, inflationary or
recessionary gap, will the economy face after the AD shock indicated
by the shift in AD curves? What types of fiscal policy instruments
will help move the economy back to the potential level of output
(real GDP)? Give specific examples.