QUESTION B2 The figure below depicts aggregate demand and aggregate supply in the nation of Pacifica in 2019. Long-Run AS Short-Run AS AD Real GDP At the beginning of 2020, a wave of business optimism led producers to sharply increase their planned investment expenditure. a What effect, if any, will this increased investment expenditure have in the short-run on the Aggregate Demand curve? What effect, if any, will it have on the Short-Run Aggregate Supply curve? b. After the increased investment expenditure, will short-run equilibrium real GDP be above or below potential GDP? How do you know? The president of Pacifica is concerned about the effect of this new investment expenditure on the economy, and she wishes to use monetary policy to move equilibrium GDP back toward potential GDP. (For the remainder of the question, assume that the Pacifica Central Bank is Pacifica's version of the United States Federal Reserve, that Pacifica's banking and financial systems work exactly like the United States' banking and financial systems, and that Pacifica's currency is called the Pacifica dollar (P$).) c. Which one of the following policies would help the president achieve her aim? Direct the Pacifica Central Bank to purchase P$1 million of Pacifica Treasury Bills i. ii. Direct the Pacifica Central Bank to sell P$1 million of Pacifica Treasury Bills agregate Price Level
QUESTION B2 The figure below depicts aggregate demand and aggregate supply in the nation of Pacifica in 2019. Long-Run AS Short-Run AS AD Real GDP At the beginning of 2020, a wave of business optimism led producers to sharply increase their planned investment expenditure. a What effect, if any, will this increased investment expenditure have in the short-run on the Aggregate Demand curve? What effect, if any, will it have on the Short-Run Aggregate Supply curve? b. After the increased investment expenditure, will short-run equilibrium real GDP be above or below potential GDP? How do you know? The president of Pacifica is concerned about the effect of this new investment expenditure on the economy, and she wishes to use monetary policy to move equilibrium GDP back toward potential GDP. (For the remainder of the question, assume that the Pacifica Central Bank is Pacifica's version of the United States Federal Reserve, that Pacifica's banking and financial systems work exactly like the United States' banking and financial systems, and that Pacifica's currency is called the Pacifica dollar (P$).) c. Which one of the following policies would help the president achieve her aim? Direct the Pacifica Central Bank to purchase P$1 million of Pacifica Treasury Bills i. ii. Direct the Pacifica Central Bank to sell P$1 million of Pacifica Treasury Bills agregate Price Level
Chapter9: Demand-side Equilibrium: Unemployment Or Inflation?
Section9.A: The Simple Algebra Of Income Determination And The Multiplier
Problem 4TY
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Page 8 of 5
QUESTION B2
The figure below depicts aggregate demand and aggregate supply in the nation of Pacifica in
2019.
Long-Run
AS
Short-Run
AS
AD
Real GDP
At the beginning of 2020, a wave of business optimism led producers to sharply increase their
planned investment expenditure.
a. What effect, if any, will this increased investment expenditure have in the short-run on
the Aggregate Demand curve? What effect, if any, will it have on the Short-Run
Aggregate Supply curve?
b. After the increased investment expenditure, will short-run equilibrium real GDP be above
or below potential GDP? How do you know?
The president of Pacifica is concerned about the effect of this new investment expenditure on the
economy, and she wishes to use monetary policy to move equilibrium GDP back toward
potential GDP. (For the remainder of the question, assume that the Pacifica Central Bank is
Pacifica's version of the United States Federal Reserve, that Pacifica's banking and financial
systems work exactly like the United States' banking and financial systems, and that Pacifica's
currency is called the Pacifica dollar (P$).)
c. Which one of the following policies would help the president achieve her aim?
Direct the Pacifica Central Bank to purchase P$1 million of Pacifica Treasury
Bills
i.
ii.
Direct the Pacifica Central Bank to sell P$1 million of Pacifica Treasury Bills
Page 9 of 5
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