08 Jun Question Chapter 13: Economic Policy Tools in the AS/AD Model Drop Box Assignment 20 Points
Question
Chapter 13: Economic Policy Tools in the AS/AD Model
Drop Box Assignment 20 Points
1. Consider an economy that is initially in LONG RUN equilibrium as illustrated in the
following graph where LRAS is the long-run AS curve, AD is the aggregate demand curve,
SRAS is the short-run aggregate supply curve, and E is the equilibrium price and output. Answer the questions below assuming the following scenarios:
a. At FULL EMPLOYMENT, what is the effect of the following scenarios on either the AD curve or the
Money Supply? (6) EX: AD or MS shifts right or left 1. Increase Government Spending
2. Open Market Sale
3. Decrease Discount Rate
4. Increase Personal Taxes
5. Increase Subsidies
6. Decrease Required Reserve Ratio
b. At FULL EMPLOYMENT, determine whether the economy faces a Contrationary Gap or Expansionary
Gap and WHY? (6) EX: Expansionary Gap or Contractionary Gap/what is effected 1. Open Market Purchase
2. Increase Discount Rate
3. Increase Required Reserve Ratio
c. When the economy is facing a Contractionary Gap, which of the following policy instruments will
return the economy to the full employment level of real GDP? (4) EX: Full Employment or further away from Full Employment 1. Increase Government Spending
2. Increase Personal Taxes
3. Decrease Required Reserve Ratio
4. Open Market Sale
c. When the economy is facing an Expansionary Gap, which of the following policy instruments will
return the economy to the full employment level of real GDP? (4)
1. Decrease Discount Rate
2. Open Market Purchase
3. Increase Required Reserve Ratio
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