Question 1 (30 points): Assume that the economy of Raiderland is currently operating at full employment and the government budget is balanced. Also note that the marginal propensity to save is 0.2, the expected inflation rate is 7%, and the natural rate of unemployment is 4%. a. Based on the Phillips curve model, is the actual inflation rate greater than, less than, or equal to the expected inflation rate of 7% in Raiderland? Explain. (2 points) b. Using a correctly labeled graph of aggregate demand, short-run aggregate supply, and long-run aggregate supply, show the short-run equilibrium price level, labeled PL,, and output level, labeled Y,. (1 point) c. Suddenly, increased uncertainty has reduced business orders for equipment. Graphically show the impact of the change in business orders on each of the following in the short run. i. Aggregate demand. Explain. (2 points) ii. Unemployment (1 point) d. Use a correctly labeled Phillips curve to illustrate the short-term equilibrium of Raiderland's economy after the change described in part (c). (2 points) e. Based on the change in business orders in part (C), what will happen to the long-run economic growth rate in Raiderland? Explain. (2 points) f. Assume the government takes no policy action with regard to the state of Raiderland's economy. i. Graphically show what will happen to the actual rate of unemployment and price level in the long run? Explain. (3 points) ii. How will the long-run adjustment process be represented in the Phillips curve model? Explain. (3 points) g. Now assume that the Keynesians are proven correct and Raiderland's economy returns to full employment within six months. However, shortly afterwards and within a matter of weeks, the effects of massive tax cuts that Raiderland's new non-binary president, Dylan Dashiell Riemer (aka DDR and they dance really well too...BARS) all of a sudden cause intense demand-pull inflation. This inflation becomes a significant problem that causes a gap between actual and potential GDP by about $100 billion. i. Please draw a correctly labeled business cycle graph that illustrates the current state of Raiderland's economy. (3 points) Question 1 (30 points): Assume that the economy of Raiderland is currently operating at full employment and the government budget is balanced. Also note that the marginal propensity to save is 0.2, the expected inflation rate is 7%, and the natural rate of unemployment is 4%. a. Based on the Phillips curve model, is the actual inflation rate greater than, less than, or equal to the expected inflation rate of 7% in Raiderland? Explain. (2 points) b. Using a correctly labeled graph of aggregate demand, short-run aggregate supply, and long-run aggregate supply, show the short-run equilibrium price level, labeled PL,, and output level, labeled Y,. (1 point) c. Suddenly, increased uncertainty has reduced business orders for equipment. Graphically show the impact of the change in business orders on each of the following in the short run. i. Aggregate demand. Explain. (2 points) ii. Unemployment (1 point) d. Use a correctly labeled Phillips curve to illustrate the short-term equilibrium of Raiderland's economy after the change described in part (c). (2 points) e. Based on the change in business orders in part (C), what will happen to the long-run economic growth rate in Raiderland? Explain. (2 points) f. Assume the government takes no policy action with regard to the state of Raiderland's economy. i. Graphically show what will happen to the actual rate of unemployment and price level in the long run? Explain. (3 points) ii. How will the long-run adjustment process be represented in the Phillips curve model? Explain. (3 points) g. Now assume that the Keynesians are proven correct and Raiderland's economy returns to full employment within six months. However, shortly afterwards and within a matter of weeks, the effects of massive tax cuts that Raiderland's new non-binary president, Dylan Dashiell Riemer (aka DDR and they dance really well too...BARS) all of a sudden cause intense demand-pull inflation. This inflation becomes a significant problem that causes a gap between actual and potential GDP by about $100 billion. i. Please draw a correctly labeled business cycle graph that illustrates the current state of Raiderland's economy. (3 points)
