PART A
Thinking back to the business cycle discussion, how would Keynesian economists explain the performance of the economy duringthe last few years? What has happened to aggregate demand? What evidence can you present to support this position?
Next, how would neoclassical economists explain the performance of the economy duringthe last few years?What has happened to aggregate supply? What evidence can you present to support this position?
Evaluate the evidence and decide which interpretation makes the most sense to you.Explain your reasoning.
PART B
Keynesian and Neoclassical Economics Problem Set 1. The graph below shows the AD-AS diagram for Canada. 1200 1100 1000 AD 900 800 700 Price Level 600 500 400 SRAS 300 200 100 LRAS 0 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 Real GDP What type of the GDP gap is observed in Canada (select one)? a. There is no recessionary or inflationary gap. b. The economy is facing a recessionary gap. c. The economy is facing an inflationary gap.2. The graph below shows the AD-AS diagram for Canada. 1200 1100 1000 AD 900 800 700 Price Level 600 500 400 /SRAS 300 200 100 LRAS 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 Real GDP What type of fiscal policy should the government of Canada be implementing to bring the economy to the long-run equilibrium (select one)? a. There is no need for either contractionary or expansionary fiscal policy. b. The government should implement expansionary fiscal policy. c. The government should implement contractionary fiscal policy.3. Suppose that we observe a fall in expected rate of return. Which graph most accurately shows how this would affect the aggregate demand - aggregate supply model? Note that the new curve is shown in gray. a. AS curve shifts right: _c. AS curve shifts left: AD AD A51 A52 b. AD curve shifts right: d AD curve Shifts left: it Use the following information to answer questions 4 through 6: The graph below shows the Long-Run Aggregate Supply Curves (LRAS) for Brazil. 1200 1100 1000 900 800 700 Price Level 600 500 400 300 200 100 0 LRAS1 LRAS2 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 Real GDP 4. What event could shift LRAS from LRAS1 (black color) to LRAS2 (red color) in Brazil (select one)? a. Increase in capital. b. Decrease in labor. c. Decrease in human capital. 5. What event could shift LRAS from LRAS1 (black color) to LRAS2 (red color) in Brazil (select one)? a. Increase in fertility rate. b. Decrease in labor. c. War. 6. What event could shift LRAS from LRAS1 (black color) to LRAS2 (red color) in Brazil (select one)? a. Discovery of new mineral deposits. b. Decrease in labor. c. Decrease in human capital.Use the following information to answer questions 7 through 11: The graph below shows the AD-AS diagram for Brazil. Suppose that the economy is initially in long-run equilibrium with the price level of 800. Now suppose that the Aggregate Demand (AD) curve shifts right from AD1 (blue) to AD2 (green). 1200 AD2 1100 1000 AD 1 900 800 700 Price Level 600 500 400 SRAS1 300 200 100 0 LRAS 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 Real GDP 7. What is the new GDP in the short-run as a result of this shift? 8. What is the new price level in the short-run as a result of this shift? 9. What is the price level in the new long-run equilibrium as a result a result of this shift? 10. What is GDP in the new long-run equilibrium as a result of this shift?11. What causes the economy to move from the short-run equilibrium to the new long-run equilibrium (select one)? Decreased wages. Increased prices. Decreased prices. Increased wages. 9195793 Use the following information to answer questions 12 through 15: The graph below shows the AD-AS diagram for Brazil. Suppose that the economy is initially in long-run equilibrium with the price level of 800 [AD1 and SRASl). Now suppose that the federal government decreases spending. 'I 200 1 100 1 000 900 800 700 600 Price Level 500 400 300 200 'I 00 0 100 200 300 400 500 600 700 800 900100011001200 Real GDP 12. As a result of this event, what is the new short-run price level? 13. As a result of this event, what is the new short-run GDP? 14. As a result of this event, what is the new long-run price level? 15. As a result of this event, what is the new long-run GDP

Question

PART A

Thinking back to the business cycle discussion, how would Keynesian economists explain the performance of the economy duringthe last few years? What has happened to aggregate demand? What evidence can you present to support this position?

Next, how would neoclassical economists explain the performance of the economy duringthe last few years?What has happened to aggregate supply? What evidence can you present to support this position?
Evaluate the evidence and decide which interpretation makes the most sense to you.Explain your reasoning.

PART B

Keynesian and Neoclassical Economics Problem Set 1. The graph below shows the AD-AS diagram for Canada. 1200 1100 1000 AD 900 800 700 Price Level 600 500 400 SRAS 300 200 100 LRAS 0 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 Real GDP What type of the GDP gap is observed in Canada (select one)? a. There is no recessionary or inflationary gap. b. The economy is facing a recessionary gap. c. The economy is facing an inflationary gap.2. The graph below shows the AD-AS diagram for Canada. 1200 1100 1000 AD 900 800 700 Price Level 600 500 400 /SRAS 300 200 100 LRAS 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 Real GDP What type of fiscal policy should the government of Canada be implementing to bring the economy to the long-run equilibrium (select one)? a. There is no need for either contractionary or expansionary fiscal policy. b. The government should implement expansionary fiscal policy. c. The government should implement contractionary fiscal policy.3. Suppose that we observe a fall in expected rate of return. Which graph most accurately shows how this would affect the aggregate demand - aggregate supply model? Note that the new curve is shown in gray. a. AS curve shifts right: _c. AS curve shifts left: AD AD A51 A52 b. AD curve shifts right: d AD curve Shifts left: it Use the following information to answer questions 4 through 6: The graph below shows the Long-Run Aggregate Supply Curves (LRAS) for Brazil. 1200 1100 1000 900 800 700 Price Level 600 500 400 300 200 100 0 LRAS1 LRAS2 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 Real GDP 4. What event could shift LRAS from LRAS1 (black color) to LRAS2 (red color) in Brazil (select one)? a. Increase in capital. b. Decrease in labor. c. Decrease in human capital. 5. What event could shift LRAS from LRAS1 (black color) to LRAS2 (red color) in Brazil (select one)? a. Increase in fertility rate. b. Decrease in labor. c. War. 6. What event could shift LRAS from LRAS1 (black color) to LRAS2 (red color) in Brazil (select one)? a. Discovery of new mineral deposits. b. Decrease in labor. c. Decrease in human capital.Use the following information to answer questions 7 through 11: The graph below shows the AD-AS diagram for Brazil. Suppose that the economy is initially in long-run equilibrium with the price level of 800. Now suppose that the Aggregate Demand (AD) curve shifts right from AD1 (blue) to AD2 (green). 1200 AD2 1100 1000 AD 1 900 800 700 Price Level 600 500 400 SRAS1 300 200 100 0 LRAS 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 Real GDP 7. What is the new GDP in the short-run as a result of this shift? 8. What is the new price level in the short-run as a result of this shift? 9. What is the price level in the new long-run equilibrium as a result a result of this shift? 10. What is GDP in the new long-run equilibrium as a result of this shift?11. What causes the economy to move from the short-run equilibrium to the new long-run equilibrium (select one)? Decreased wages. Increased prices. Decreased prices. Increased wages. 9195793 Use the following information to answer questions 12 through 15: The graph below shows the AD-AS diagram for Brazil. Suppose that the economy is initially in long-run equilibrium with the price level of 800 [AD1 and SRASl). Now suppose that the federal government decreases spending. 'I 200 1 100 1 000 900 800 700 600 Price Level 500 400 300 200 'I 00 0 100 200 300 400 500 600 700 800 900100011001200 Real GDP 12. As a result of this event, what is the new short-run price level? 13. As a result of this event, what is the new short-run GDP? 14. As a result of this event, what is the new long-run price level? 15. As a result of this event, what is the new long-run GDP