1. Use AD/AS graphs to show the short-run effects of each of the following shocks/shifts on the aggregate price level and on aggregate output. Begin all graphs in long run equilibrium before the change. Then identify the type of gap created by the change as either an inflationary gap, recessionary gap, or stagflation. a. A weak auto industry has prompted less investment spending by many firms that manufacture auto parts. b. Congress lowers taxes and increases spending. c. The average wage rises above inflation for the first quarter of the year. d. Newspapers report housing sales have decreased for the third month in a row.
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A weak auto industry has prompted less investment spending by many firms that manufacture auto parts: This would lead to a decrease in aggregate demand (AD) as investment spending is a component of AD. The AD curve would shift to the left, leading to a lower price Show more…
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Use graphical analysis to show how each of the following would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output, that prices and wages are eventually flexible both upward and downward, and that there is no counteracting fiscal or monetary policy. a. Because of a war abroad, the oil supply to the United States is disrupted, sending oil prices rocketing upward. b. Construction spending on new homes rises dramatically, greatly increasing total U.S. investment spending. c. Economic recession occurs abroad, significantly reducing foreign purchases of U.S. exports.
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