AP Macro Unit 3 & 4 FRQ Exam Form A Name: Hr: I. Assume a country's economy is operating below full employment, with an output gap of $600 billion. a. Draw a correctly labeled graph of aggregate demand, short-run aggregate supply, and long-run aggregate supply, and show each of the following. i. The current equilibrium real output and price level, labeled as Y1 and PL1, respectively ii. The full-employment output labeled as Y{ b. Assume government spending increases by $100 billion. On your graph in part a), show the short-run effect of the change in government spending on the equilibrium real output and price level. Label the new output as Y2 and the new price level as PL2. c. Assume the marginal propensity to consume is 0.8. As a result of the increase in government spending, what is the numerical value of the maximum change in real output in the short run? Show yvour work. d. Did the government spending increase bring the economy back to full employment? Explain. AP Macro Unit 3 & 4 FRQ Exam Form A Name: Hr: e. Assume the federal reserve operates under a limited reserve system, and decides to buy bonds on the open market at a value $100 billion. Draw a correctly labeled graph of the money market, and show the effect of the bond purchase on the nominal interest rate. f. Based solely on the change in the nominal interest rate shown in part (e), what will happen to each of the following? i. Real GDP in the short run. Explain. ii. Price of previously existing bonds