Section 12

Denethor, son of Echthelion II, is Steward of Gondor in the absence of the rightful king. He is a firm believer in Say's Law and the laissez-faire approach to the economy of Gondor.

a) Draw aggregate demand, aggregate short run supply and aggregate long run supply for Gondor's economy in long run equilibrium. What is the unemployment level?

b) Consumers in Minas Tirith believe there will be an acute shortage developing in the supply of rings and anticipate higher future price levels in the economy. Draw and explain what happens to aggregate demand in the Gondorian economy in the short run. Identify any change in determinant(s) and explain why and how the change occurs. What happens to the price level, unemployment and real GDP in the short run? Is there an inflationary or recessionary gap?

c) Draw and explain what happens to the Gondorian economy in the long run as a result of b). What happens to the price level, unemployment and real GDP in the long run? Include all the dynamics in your explanation and graph.

d) The Gondorian dollar appreciates. Draw and explain what happens to aggregate demand in the Gondorian economy in the short run. Identify any change in determinant(s) and explain why and how the change occurs. What happens to the price level, unemployment and real GDP in the short run? Is there an inflationary or recessionary gap?

e) Draw and explain what happens to the Gondorian economy in the long run as a result of d). What happens to the price level, unemployment and real GDP in the long run? Include all the dynamics in your explanation and graph.

f) A new discovery of mithril (a valuable metal resource) is located in the White Mountains of Gondor. Draw and explain what happens to the kingdom's economy. What happens to the price level and real GDP in the long run?