2023 Free Response · Set 2

Using the relevant numerical values given, draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the current short-run equilibrium point as X. Plot the relevant numerical values provided on the graph.

Is the expected inflation rate greater than, less than, or equal to 1% ? Explain.

Assume the marginal propensity to consume is 0.9.

If the government decreases income taxes by $20 billion, calculate the maximum change in aggregate demand. Show your work.

Assume the marginal propensity to consume is 0.9.

If instead the government increases spending by $20 billion, calculate the maximum change in aggregate demand. Show your work.

On your graph in part (a), show a possible new short-run equilibrium point labeled Z that would result if the government increases spending and there is no change in inflationary expectations.

How would an increase in unemployment compensation affect aggregate demand in the short run? Explain.

Assume instead the government takes none of the preceding policy actions. (Northland is still in short-run equilibrium; the actual unemployment rate is 7%, the actual inflation rate is 1%, and the natural unemployment rate is 5%.) What will happen to each of the following in the long run?

The short-run aggregate supply curve. Explain.

Assume instead the government takes none of the preceding policy actions. (Northland is still in short-run equilibrium; the actual unemployment rate is 7%, the actual inflation rate is 1%, and the natural unemployment rate is 5%.) What will happen to each of the following in the long run?

The short-run Phillips curve

Assume instead the government takes none of the preceding policy actions. (Northland is still in short-run equilibrium; the actual unemployment rate is 7%, the actual inflation rate is 1%, and the natural unemployment rate is 5%.) What will happen to each of the following in the long run?

The actual unemployment rate

Assume real income in the United States increases while real income in South Africa remains the same. Will United States net exports increase, decrease, or remain unchanged? Explain.

Based on your answer to part (a), what will happen to each of the following?

The capital and financial account balance in the United States

Based on your answer to part (a), what will happen to each of the following?

Actual unemployment in South Africa in the short run. Explain.

The currency of the United States is the dollar (USD), and the currency of South Africa is the rand (ZAR). Draw a correctly labeled graph of the foreign exchange market for the rand and show the effect of the increase in real income in the United States on the international value of the rand.

Draw a correctly labeled graph of the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, and show each of the following.

The current equilibrium real output and price level, labeled $Y_1$ and $PL_1$, respectively

Draw a correctly labeled graph of the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, and show each of the following.

The full-employment output, labeled $Y_F$

On your graph in part (a), show the short-run effect of an increase in consumer confidence. Label the new equilibrium real output $Y_2$ and the new equilibrium price level $PL_2$.

Assume that the banking system in Zen has ample reserves. Suppose that the central bank's goal is to maintain a stable price level at $PL_1$. Based on the change in the price level shown in part (b), identify one specific monetary policy action the central bank would take to achieve its goal.

Based on the monetary policy action identified in part (c), will real output increase, decrease, or stay the same in the short run? Explain.