Objective is to understand the questions

Question 1:

Suppose the economy is in a long-run equilibrium, as shown on the following graph. Now suppose a fall in government purchases reduces aggregate demand. On the following graph, shift a curve or adjust the point to reect the short-run e'ect of reduction in government purchases. LRP SRF'C Short-Run EM LRPG Ination Rate Unen'lployn'ranl Rate True or False: If the Fed undertakes expansionary monetary policy, it can return the economy to its original unemployment rate but the ination rate will be higher. True False Now, suppose the economy is back in long-run equilibrium, and then the price of imported oil n'ses. On the following graph, shi' a curve or adjust the point to reflect the shortrun e'ect of the increase in the price of oil. 0 SRF'C Short-Rm EM _n_ 2 i g True or False: If the Fed undertakes expansionary monetary policy, it can return the economy to its original ination rate but the unemployment rate will be higher. True False As described in the chapter, the Federal Reserve in 2008 faced a decrease in aggregate demand caused by the housing and financial crises and a decrease in short-run aggregate supply caused by rising commodity prices. Starting from a long-run equilibrium, illustrate the effects of these two changes on aggregate supply and aggregate demand on the following graph. Then, on the subsequent graph, indicate what happens on a Phillips-curve diagram. LRAS Aggregate Supply Aggregate Demand -0- Aggregate Supply A Price Level LRAS Aggregate Demand .+ Long-Run Equilibrium Quantity of Output (? LRPC O- SRPC LRPC .+ Inflation Rate Long-Run Equilibrium SRPC Unemployment Rate Which of the following is true as a result of the two changes in aggregate demand and aggregate supply? (Note: Do not consider the magnitudes of the shifts given on the preceding graphs. Think only about the directions of the shifts.) Check all that apply. Equilibrium output will rise. The effect on the inflation rate will be ambiguous. The price level will fall. Unemployment will rise. Suppose the Fed responds quickly to these shocks and adjusts monetary policy to keep unemployment and output at their natural rates. On each of the previous graphs, adjust the curve or curves (if necessary) to show the long-run results, and place a black point (plus symbol) on the point representing the new long-run equilibrium. True or False: In these situations, the Fed always takes the course of action you selected. True False