Now, let's apply your knowledge of the AD/AS model to predict the effect on economic variables (i.e., P, RGDP, interest rates, wages, savings and spending) of some events on the U.S. economy. Diagram the effect of the following events. Be sure to explain the effects in the short run and effects in the long run for each question, in words. To keep things clear, assume that in each case the economy starts out at long-run equilibrium. A. Labor unions become better organized, and this allows them to drive up wages in the short run in the U.S. (3 points) B. Tensions in South America dramatically increase the price of coffee. For the sake of argument, suppose coffee is an important input in many industries, including computer programming, transportation, and financial services. (3 points) _____________ Copyright 2021 Apex Learning. See Terms of Use for further information. AP Macroeconomics Page 4 of 6 Test: The AD/AS Model User Name:_______________ Instructor: _______________ Date:_________ (print clearly) C. The government increases both taxes and spending by $500 billion. The money is spent domestically. Hint: Be sure to provide a strict interpretation of the AD/AS model as part of your answer. (3 points) D. Suddenly, foreign countries sell great quantities of important inputs such as steel and computer chips at very low prices in this country. Hint: The long-run effect will depend on whether the price decrease is permanent or not. (3 points) _____________ Copyright 2021 Apex Learning. See Terms of Use for further information. AP Macroeconomics Page 5 of 6 Test: The AD/AS Model User Name:_______________ Instructor: _______________ Date:_________ (print clearly) E. Households significantly reduce their spending and start saving a larger portion of their income, leading to a decrease in interest rates. Hint: Think about another sector of the economy and how it might respond to lower interest rates and what effect this will have on the model. (3 points)