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14 . Economic uctuations II The following graph shows the shortrun aggregate supply curve {AS}, the aggregate demand curve {AD}, and the longrun aggregate supply curve {LRASJ for a hypothetical economy. Initially. the expected price level is equal to the actual price level. and the economy:r is in longrun equilibrium at its LRAS of $80 billion. Suppose war in the world's main oilproducing region sharply reduces the world oil supply, causing oil prices to rise and increasing the costs of producing goods and services in this economy. Adjust the appropriate curve or curves on the graph to reect the increase in production costs in the short run. Note: For simplicity, assume no impact of higher oil prices on LRAS. 1-1-0 LEM o 130 IRS [RD 120 + _l '110 AS Lu 3: Lu l \")0 ---------+ + E E m LRAS 313 l] 70 50 El] 35 TU 75 BI] 35 m 95 \"30 OUTPUT {Billions Of dollars} 7. Inflation and the nominal interest rate When the actual and expected (or anticipated) inflation rates are both zero, the money interest rate must equal the real interest rate. How might inflation affect the money interest rate? The nominal interest rate is determined by the forces of supply and demand in the loanable funds market (in millions of dollars). The following calculator shows the market for loanable funds. You can shift the supply and demand curves by changing the values of the supply and demand shifters on the right. Use the calculator to help you answer the following questions. You will not be graded on any changes you make to the calculator. Graph Input Tool (? ) IInterest Rate 10 Supply (Percent) Quantity 250 Quantity supplied 250 demanded (Millions of dollars) (Millions of dollars) Demand Shifter Supply Shifter INTEREST RATE (Percent) Expected Inflation 0 Expected Inflation (percent) 0 (percent) Demand 100 200 300 400 500 LOANABLE FUNDS (Millions of dollars) If the expected inflation rate increases to 2%, then the supply of loanable funds will and the demand for loanable funds will When the expected inflation rate is zero, the money interest rate is * . Thus, an expected inflation rate of 2% results in a money interest rate of and a real interest rate ofIn the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift Many workers leave to pursue more lucrative careers in foreign economies. A scientific breakthrough significantly increases food production per acre of farmland. A natural disaster destroys a significant amount of the economy's production facilities.11 . The slope and position of 1e longrun aggregate supply curve Suppose the eoonomy produces real GDP of $30 billion when unemployment is at its natural rate. Use the purple points (diamond symbo to plot the economy's longrun aggregate supply (LRAS) curve on the graph. ('3 132 121; LRAS 124 1213 11B PRICE LE'Li'EL 112 'IDB \")4 \"JG D 10 2'0 30 4|] 53 BI] 70 BI] OUTPUT {Billions of dollars] Suppose the government passes a lamI that reduces unemployment benets in a way 'd'iat causes unemployed workers to seek out newI jobs morn quickly. The policy will cause the natural rate of unemployment to V . This will result in which of the following? \f9 . Determinants of aggregate demand The following graph shows a decrease in aggregate demand (AD) in a hypothetical country. Specically, aggregate demand shifts to the left from AD: to ADZ, causing the quantity of output demanded to fall at all price levels. For example; at a price level of 140, output is now $200 billionr where previously it was $300 billion. . 170 169 150 MO 130 PRICE LE'u'EL 1213 110 \"JO a III) 2m 3m 4110 son one no one DUTPUT {Billions of dollars] The following table lists several determinants of aggregate demand. Complete the table by indicating the change in each determinant necessary to decrease aggregate demand. 10 . Determinants of aggregate supply The following graph shows an increase in short-run aggregate supply in a hypothetical economy where the currency is the dollar. Specifically, aggregate supply shifts to the right from SRAS1 to SRAS2, causing the quantity of output supplied at a price level of 100 to rise from $200 billion to $250 billion. (?) 200 175 SRAS 150 SRAS. 125 100 PRICE LEVEL 50 50 100 150 200 250 300 350 400 QUANTITY OF OUTPUT The following table lists several determinants of short-run aggregate supply. Fill in the table by indicating the changes in the determinants necessary to increase short-run aggregate supply.240 LRAS 200 SRAS SRAS O 180 LRAS 120 PRICE LEVEL 80 40 6 12 18 24 REAL GDP (Trillions of dollars) Assuming aggregate demand is not affected by the set of market reforms, the long-run effect of this supply shock is in aggregate output and in the price level.13 . Shortrun shocks in the ADAS model The following graph shows an economy that is initially:r in equilibrium. Then, increasing use of information technology.r causes rapid improvement in pro ductivitv. 0n the graph, Show the economic impact ofthi's event in the shortmu aggregate demand and aggregate supply {ADAS) n'nzlo'euI by shifting one or both curves. SRAS ERAS PRICE LE'u'EL -----+ REALGDF' This event is an example of V .As a result, the price level V , and the equilibrium real GDP 7