For each problem analyze the effects in the Goods and Services market.For problems #1 to #3 assume the economy initially begins at a long-run equilibrium.

1. Suppose international oil prices temporarily decrease.

a.Given the various shifters discussed in class, which curve shifts first and why? Show the graph of the Goods and Services market, including the shift.

b.What happened to the price level and RGDP in the short-run? What type of business cycle did this cause?

c.Over time, if this is just a temporary change that eventually reverses itself, what subsequent shift will occur? Indicate this shift using your graph given above.What is the ultimate long-run effect on the Deflator and RGDP?

1. Suppose the amount of buildings and machinery in the U.S. decreases.

a.Which curve(s) shifts and why? Graph the Goods and Services market including the shift(s).

b.What happened to the price level and RGDP?

c.Will this cause a temporary business cycle? Why or why not?

1. Suppose the Fed increases interest rates in the country.

a.Which curve shifts first and why? Graph the Goods and Services market, including the shift.

b.What happened to the price level and RGDP in the short-run? What type of business cycle did this cause?

c.Over time, what will eventually happen to resource costs given the above scenario?

d.From your answer in part c, what subsequent shift will occur? Indicate this shift using your graph given above.What is the ultimate long-run effect on the Deflator and RGDP?

4.a) Graph an economy currently in a positive business cycle (over-producing).

4.b) Explain what eventually will cause this economy to return to potential RGDP.Show this change on the graph above.