Using AS and AD curves to illustrate, describe the effects of the following events on the price level and on equilibrium GDP in the long run assuming that input prices fully adjust to output prices after some lag: a. An increase occurs in the money supply above potential GDP b. GDP is above potential GDP, and a decrease in government spending and in the money supply occurs c. Starting with the economy at potential GDP, a war in the Middle East pushes up energy prices temporarily. The Fed expands the money supply to accommodate the inflation.
Using AS and AD curves to illustrate, describe the effects of the following events on the price level and on equilibrium GDP in the long run assuming that input prices fully adjust to output prices after some lag: a. An increase occurs in the money supply above potential GDP b. GDP is above potential GDP, and a decrease in government spending and in the money supply occurs c. Starting with the economy at potential GDP, a war in the Middle East pushes up energy prices temporarily. The Fed expands the money supply to accommodate the inflation.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Using AS and AD curves to illustrate, describe the effects
of the following events on the price level and on equilibrium
GDP in the long run assuming that input prices fully
adjust to output prices after some lag:
a. An increase occurs in the money supply above potential
GDP
b. GDP is above potential GDP, and a decrease in government
spending and in the money supply occurs
c. Starting with the economy at potential GDP, a war in
the Middle East pushes up energy prices temporarily.
The Fed expands the money supply to accommodate the
inflation.
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