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Marcoeconomics

Marcoeconomics. 2006. Question 1. 1. Assume that the U.S. economy is currently operating at an equilibrium below full employment. Draw a correctly labeled graph of aggregate demand and aggregate supply, and show each of the following. (i) Long-run aggregate supply.

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Marcoeconomics

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  1. Marcoeconomics 2006 Question 1

  2. 1. Assume that the U.S. economy is currently operating at an equilibrium below full employment. • Draw a correctly labeled graph of aggregate • demand and aggregate supply, and show each • of the following. (i) Long-run aggregate supply (ii) Current equilibrium output and price level LRAS LRAS PL PL AS PLc PLc AD AD RGDP Yc Yc Yf Yf RGDP

  3. Now assume a significant increase in the world • price of oil, a major production input for the U.S. • Show on your graph in part (a) how the increase • in the oil price affects each of the following in • the short run. (i) Short-run aggregate supply (ii) Real output and price level LRAS LRAS PL PL AS AS1 PL1 PL1 PLc PLc AD AD RGDP Yc Y1 Yc Yf Y1 Yf RGDP

  4. Given your answer in part (b), explain what will • happen to unemployment in the U.S. in the • short run. As output (RGDP) goes down, unemployment goes up. LRAS LRAS PL PL AS AS1 PL1 PL1 PLc PLc AD AD RGDP Yc Y1 Yc Yf Y1 Yf RGDP

  5. Assume that the U.S. trades with Japan. Draw a • correctly labeled graph of the foreign exchange • market for the U.S. dollar. Based on your • indicated change in real output in part (b), show • and explain how the supply of the U.S. dollar • will be affected in the foreign exchange market. Yen/ Dollar S1 Supply of dollars in the currency exchange market decreases. As output goes down and unemployment goes up, there is less income to buy foreign goods. S P1 P D Q1 Q Q of Dollars Dollar Market

  6. Given your answer in part (d), indicate what will • happen to the value of the U.S. dollar relative to • the Japanese yen. The U.S. dollar will appreciate relative to the Japanese yen. Yen/ Dollar S1 S P1 P D Q1 Q Q of Dollars Dollar Market

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