Please answer all the questions correctly.

1. Key facts about economic fluctuations The graph included below approximates United States business cycles between quarter one of1947 and quarter three of 1951. The shaded region denotes periods of six or more consecutive months of declining real gross domestic product (real GDP). \fNotice that real GDP trends upward over time but experiences ups and downs in the short run. A period of declining real GDP, such as the blue-shaded period in 1948, is known as V . True or False: Small ups and downs in real GDP follow a consistent, predictable pattern. 0 True 0 False Which of the following probably occurred as the U.S. economy experienced declining real GDP in 1948? Check all that apply. C] The unemployment rate increased. C] Car sales increased. C] Consumer spending increased. C] Total real income declined. \f3. Why the aggregate demand curve slopes downward The graph below shows the aggregate demand (AD) curve for a hypothetical economy. At point X, the quantity of output demanded is $500 billion, and the price level is 120. Moving up along the AD curve from point X to point Y, the quantity of output demanded falls to $300 billion, and the price level rises to 140. \fAs the price level rises, the purchasing power of households' real wealth will Y , causing the quantity of output demanded to V . This phenomenon is known as the V effect. Additionally, as the price level rises, the impact on the domestic interest rate will cause the real value of the dollar to V in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore V , and the number of foreign products purchased by domestic consumers and firms (imports) will V . Net exports will therefore V , causing the quantity of domestic output demanded to V . This phenomenon is known as the Y effect. 5. The slope and position of the long-run aggregate supply curve Assume the Federal Reserve triples the growth rate of the quantity of money in circulation. In the long run, this increase in money growth will affect which of the following? Check all that apply. C] The size of the labor force C] The price level C] The quantity of physical capital C] The inflation rate \fSuppose now the government passes a law that reduces unemployment benefits in a way that causes unemployed workers to seek out new jobs more quickly. This change in policy will cause the natural rate of unemployment to V , which will: 0 Shift the long-run aggregate supply curve to the right 0 Not impact the long-run aggregate supply curve 0 Shift the long-run aggregate supply curve to the left Complete the following table by determining how each event impacts the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift An investment tax credit increases the rate at which firms acquire machinery and '7 equipment. The government allows more immigration of working-age adults who find work. 7 This economy's primary source of foreign oil decides to cease exports for political reasons. '7 6. Why the aggregate supply curve slopes upward in the short run In the short run, the quantity of output supplied by firms can deviate from the natural level of output if the actual price level deviates from the expected price level in the economy. A number of theories explain reasons why this might happen. For example, the sticky-wage theory asserts that output prices adjust more quickly to changes in the price level than wages do, in part because of long-term wage contracts. Suppose a firm signs a contract agreeing to pay its workers $15 per hour for the next year, based on an expected price level of 100. If the actual price level turns out to be 90, the firm's output prices will V , and the wages the firm pays its workers will remain fixed at the contracted level. The firm will respond to the unexpected decrease in the price level by V the quantity of output it supplies. If many firms face similarly rigid wage contracts, the unexpected decrease in the price level causes the quantity of output supplied to V the natural level of output in the short run. Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation: Quantity of Output Supplied = Natural Level of Output + a x (Price Level Actual - Price Level Expected) The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that a = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 105. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 95, 100, 105, 110, and 115.\fThe short-run quantity of output supplied by firms will fall short of the natural level of output when the actual price level V the price level that people expected. 8. Economic fluctuations I The foiiowing graph shows a hypothetical economy in iong-run equilibrium at an expected price level of 120 and a natural output level of $600 billion. Suppose the government increases spending on building and repairing highways, bridges, and ports. Using the graph, shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the increase in government spending. \fIn the short run, the increase in government spending on infrastructure causes the price level to V the price level people expected and the quantity of output to V the natural level of output. The increase in government spending will cause the unemployment rate to V the natural rate of unemployment in the short run. Again, the Following graph shows a hypothetical economy experiencing long-run equilibrium at the expected price level of 120 and natural output level of $600 billion, prior to the increase in government spending on infrastructure. Along the transition from the short run to the long run, price-level expectations will V and the V curvewillshii'ttothe V Using the graph, illustrate the long-run impact of the increase in government spending by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve in the appropriate directions. \fIn the long run, due to the increase in government spending, the price level V , the quantity of output Y the natural level of output, and the unemployment rate V the natural rate. 9. Economic fluctuations II The following graph shows the aggregate demand curve (AD), the short-run aggregate supply curve (AS), and the long-run aggregate supply curve (LRAS) for a hypothetical economy. Initially, the expected price level equals the actual price level, and the economy experiences long-run equilibrium at a natural level of output of $100 billion. Suppose a bout of severe weather drives up agricultural costs, increases the costs of transporting goods and services, and increases the costs of producing goods and services. Use the graph to help you answer the questions about the short-run and long-run effects of the increase in production costs that follow. (Note: You will not be graded on any adjustments made to the graph. ) Hint: For simplicity, ignore any possible impact of the severe weather on the natural level of output.\fThe short-run economic outcome resulting from the increase in production costs is known as V . Suppose now that the government immediately pursues an accommodative policy by increasing government purchases in response to the short-run impact of the severe weather. 1n the long run, given that the government pursues accommodative policy, the output level in the economy will equal billion and the price level will equal :.