Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. □ The quantity of physical capital The level of technological knowledge The inflation rate The price level Suppose the economy produces real GDP of $60 billion when unemployment is at its natural rate. Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph. (?) 132 PRICE LEVEL 128 132 128 124 120 116 112 108 104 100 0 10 20 40 50 60 30 OUTPUT (Billions of dollars) 70 80 RAS

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**Understanding Long-Run Economic Effects**

Suppose the Federal Reserve (the Fed) doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? **Check all that apply.**

- The quantity of physical capital
- The level of technological knowledge
- The inflation rate 
- The price level

Suppose the economy produces real GDP of $60 billion when unemployment is at its natural rate.

**Use the purple points (diamond symbols) to plot the economy's long-run aggregate supply (LRAS) curve on the graph below.**

### Graph Explanation:

The graph shows the relationship between the Price Level (vertical axis) ranging from 100 to 132 and the Output (in billions of dollars) (horizontal axis) ranging from 0 to 80.

1. **Initial State:**
   - The graph starts with no initial plot.
   
2. **Long-Run Aggregate Supply (LRAS) Curve:**
   - Using the purple points (diamond symbols), the LRAS curve is plotted vertically at the point where Output (real GDP) equals $60 billion.
   - This vertical line indicates that in the long run, the aggregate supply is not influenced by the price level and is represented at the natural rate of output ($60 billion in this case).

**Final Graph:**
- The LRAS is depicted with a vertical line at the output of $60 billion, indicating the economy's potential output level at full employment.

This graph representation helps in understanding that in the long run, the economy's ability to produce goods and services (its real GDP) is determined by factors such as labor, capital, and technology, rather than the price level.
Transcribed Image Text:**Understanding Long-Run Economic Effects** Suppose the Federal Reserve (the Fed) doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? **Check all that apply.** - The quantity of physical capital - The level of technological knowledge - The inflation rate - The price level Suppose the economy produces real GDP of $60 billion when unemployment is at its natural rate. **Use the purple points (diamond symbols) to plot the economy's long-run aggregate supply (LRAS) curve on the graph below.** ### Graph Explanation: The graph shows the relationship between the Price Level (vertical axis) ranging from 100 to 132 and the Output (in billions of dollars) (horizontal axis) ranging from 0 to 80. 1. **Initial State:** - The graph starts with no initial plot. 2. **Long-Run Aggregate Supply (LRAS) Curve:** - Using the purple points (diamond symbols), the LRAS curve is plotted vertically at the point where Output (real GDP) equals $60 billion. - This vertical line indicates that in the long run, the aggregate supply is not influenced by the price level and is represented at the natural rate of output ($60 billion in this case). **Final Graph:** - The LRAS is depicted with a vertical line at the output of $60 billion, indicating the economy's potential output level at full employment. This graph representation helps in understanding that in the long run, the economy's ability to produce goods and services (its real GDP) is determined by factors such as labor, capital, and technology, rather than the price level.
### Impact of Government Policies on Long-Run Aggregate Supply (LRAS)

#### Hypothetical Policy Scenario
Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to:
- [Dropdown Menu], which will:
  - Shift the long-run aggregate supply curve to the right
  - Shift the long-run aggregate supply curve to the left
  - Not affect the long-run aggregate supply curve

---

### Impact Analysis of Different Events on LRAS

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve.

| Event                                                                                               | Direction of LRAS Curve Shift |
|-----------------------------------------------------------------------------------------------------|-------------------------------|
| The government allows more immigration of working-age adults who find work.                         | [Dropdown Menu]               |
| For environmental and safety reasons, the government requires that the country's nuclear power plants be permanently shut down. | [Dropdown Menu]               |
| An investment tax credit increases the rate at which firms acquire machinery and equipment.         | [Dropdown Menu]               |

---

### Explanation
- **Shift the long-run aggregate supply curve to the right:** Indicates an increase in the economy's production capacity.
- **Shift the long-run aggregate supply curve to the left:** Indicates a decrease in the economy's production capacity.
- **Not affect the long-run aggregate supply curve:** Indicates no significant change in the economy's production capacity.

In making these determinations, consider how each event influences factors such as labor force size, capital stock, and technological innovations, which are critical determinants of long-run aggregate supply.
Transcribed Image Text:### Impact of Government Policies on Long-Run Aggregate Supply (LRAS) #### Hypothetical Policy Scenario Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to: - [Dropdown Menu], which will: - Shift the long-run aggregate supply curve to the right - Shift the long-run aggregate supply curve to the left - Not affect the long-run aggregate supply curve --- ### Impact Analysis of Different Events on LRAS In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. | Event | Direction of LRAS Curve Shift | |-----------------------------------------------------------------------------------------------------|-------------------------------| | The government allows more immigration of working-age adults who find work. | [Dropdown Menu] | | For environmental and safety reasons, the government requires that the country's nuclear power plants be permanently shut down. | [Dropdown Menu] | | An investment tax credit increases the rate at which firms acquire machinery and equipment. | [Dropdown Menu] | --- ### Explanation - **Shift the long-run aggregate supply curve to the right:** Indicates an increase in the economy's production capacity. - **Shift the long-run aggregate supply curve to the left:** Indicates a decrease in the economy's production capacity. - **Not affect the long-run aggregate supply curve:** Indicates no significant change in the economy's production capacity. In making these determinations, consider how each event influences factors such as labor force size, capital stock, and technological innovations, which are critical determinants of long-run aggregate supply.
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