Question
(a) Draw an AS-AD chart showing the economy initially in AS-AD equilibrium. Next, suppose the price level target is raised. Using your AS-AD chart, illustrate
(a) Draw an AS-AD chart showing the economy initially in AS-AD equilibrium. Next, suppose the price level target is raised. Using your AS-AD chart, illustrate the effect on the economy in theshort run. Briefly explain, with reference to the chart.(8 marks)
(b) Following the price level target increase in part (b), draw a chart identifying the AS-AD equilibrium to themedium run. Illustrate and carefully explain, with reference to the chart, the economy's transition path from short run AS-AD equilibrium to the medium run equilibrium. (8 marks)
(c) Draw an IS-LM chart to match the above AS-AD scenario and, with reference to the chart, illustrate and explain the economy's transition path [ie. following the price level target increase assumed in parts (b)-(c) above] from short run to long run equilibrium, in terms of IS and LM curves.(8 marks)
(d) Summarise your results above in the medium run:
outputfalls/rises/remains unchanged(circle correct answer),
the price levelfalls/rises/remains unchanged(circle correct answer),
and the interest ratefalls/rises/remains unchanged(circle correct answer).
This outcome illustrates the concept known as the_________________of money (fill in the blank)(4 marks)
(2 bonus marks for overall clarity of writing and diagrams.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started