AS/AD Practice Problems

1.(Shifting AS and AD) Sketch a well-labeled graph to illustrate each of the following scenarios. Can you describe the macroeconomic dynamics? What happens to output and aggregate price level?

a)Starting from a long-run macroeconomic equilibrium, draw a short-run AD-AS graph showing the effect of a severe drop in stock prices that decreases households' and businesses' wealth. Indicate the short-run effect on the equilibrium aggregate price level and equilibrium aggregate output.

b)Starting from a long-run macroeconomic equilibrium, draw a short-run AD-AS graph showing the effect of a significant decrease in the world supply of oil. Indicate the short-run effect on the equilibrium aggregate price level and equilibrium aggregate output.

c)Draw an AD-AS graph showing a recessionary gap. Describe the prevailing economic conditions: what is the state of GDP, unemployment, and inflation?

d)Draw an AD-AS graph showing an inflationary gap. Describe the prevailing economic conditions: what is the state of GDP, unemployment, and inflation?

2.(SR and LR Macroeconomic Equilibrium) Sketch a well-labeled graph to illustrate each of the following scenarios. Can you describe the macroeconomic dynamics?

e)Draw a graph illustrating short-run macroeconomic equilibrium.

f)Draw a graph illustrating long-run macroeconomic equilibrium.