1. Plot an AD-AS Graph. This problem is adapted from Ch.11Problem 61 Table 11.4 Santher's Economy.

Table 11.4describes Santher's economy.

Price Level

AD

AS

50

1,000

250

60

950

580

70

900

750

80

850

850

90

800

900

1. (4 points) Plot the AD/AS curves and identify the equilibrium. Label correctly the AD/AS graph, and state the amount of equilibrium price and equilibrium GDP.
2. (2 points) Based on Keynesian and Neoclassical perspectives, would you expect unemployment in rate this economy to be relatively high or low, and explain why?
3. (2 points) Would you expect prices to be a relatively large or small concern for this economy, explain why?
4. (2 points) Imagine that input prices fall and so AS shifts to the right by 150 units. Plot a new AS curve (on the same graph you got in a.) and identify the new equilibrium on the same graph from (a). What are the new equilibrium price and GDP figures?
5. (2 points) How will the shift in AS affect the original output, price level, and employment?

Ch.12 Keynesian Perspective on MPC and Spending Multiplier (Instructor Note)

2. Assume that there is an autonomous increase in investment spending of $20 billion and the MPC is given as 0.4, and assuming taxes, imports, and savings are all equal and no leakages:

a.(2 points) How large is the spending multiplier? (Use the simple multiplier equation to calculate it.)

b.(2 points) How much is the total change in GDP from this autonomous increase in investment spending?

c.(4 points) Do you think a larger or smaller MPC would help the economy, and why? What could be some concerns about the spending multiplier?