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AP MACROECONOMICS 2009 FORM B, QUESTION 1

AP MACROECONOMICS 2009 FORM B, QUESTION 1. By Gagik Gabrielyan. Given information: The unemployment rate in the country of Southland is greater than the natural rate of unemployment. 9 points total.

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AP MACROECONOMICS 2009 FORM B, QUESTION 1

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  1. AP MACROECONOMICS2009 FORM B, QUESTION 1 By Gagik Gabrielyan

  2. Given information: The unemployment rate in the country of Southland is greater than the natural rate of unemployment.9 points total.

  3. A) Using a correctly labeled graph of the aggregate demand and aggregate supply, show the current equilibrium real gross domestic product, labeled Yc, and price level in Southland, labeled PLc.(2 points) • You get one point for a correctly labeled graph with vertical LRAS curve. • You get one point by labeling the current equilibrium output, Yc, and price leve, PLc.

  4. New information: The president of Southland is receiving advice from two economic advisers-Kohelis and Raymond-about how best to reduce unemployment in Southland.

  5. B) Kohelis advises the president to decrease personal income taxes.i) how would such a decrease in taxes affect aggregate demand? Explainii) Using a correctly labeled graph of the short-run phillips curve, show the effect of the decrease in taxes. Label the initial equilibrium from part (a) as point A, and the new equilibrium resulting from the decrease in taxes as point B4 points total2 points for both i and ii

  6. i) The aggregate demand increases because the decrease in taxes raises disposable income and increases consumption spending. 2 points: one point for saying it increases, and one point for a correct explanation

  7. ii)2 points total. You get one point for a correctly labeled graph of the Phillips curve.You get another point for the correct initial and current positions.

  8. C) Raymond advises the president to take no policy action.i) What will happen to the short-run aggregate supply curve in the long run? Explain.Ii) Using a new correctly labeled graph of the short-run Phillips curve, show the effect of the change in the short-run aggregate supply you identified in part (c)(i)3 points total

  9. i)The short run aggregate supply curve will shift to the right because wages will fall, businesses will hire more workers, and output will rise.(2 points)

  10. ii) Show a leftward shift of the short-run Phillips curve. (1 point)

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