Short Run Analysis: For each of the following scenarios, identify all of the following a) which curve will shift (AD / SRAS), b) whether it will shift to the right or left c) what happens to equilibrium price, equilibrium quantity and unemployment d) whether a recessionary or inflationary gap is created. Finally sketch an economy in long run equilibrium and illustrate the shift created by the scenario in the SHORT RUN only.

1. Business investment increases. Diagram: A. Which curve (SRAS/AD)? B. Which way (L/R)? C. Effect on a. Peq? (Increase/Decrease) b. Qeq? (Increase/Decrease) c. U? (Increase/Decrease) D. Recessionary Gap/Inflationary Gap?

2. The government decreases spending. Diagram: A. Which curve (SRAS/AD)? B. Which way (L/R)? C. Effect on a. Peq? (Increase/Decrease) b. Qeq? (Increase/Decrease) c. U? (Increase/Decrease) D. Recessionary Gap/Inflationary Gap?

3. New oil discoveries cause large decreases in energy prices. Diagram:

A. Which curve (SRAS/AD)? B. Which way (L/R)? C. Effect on a. Peq? (Increase/Decrease) b. Qeq? (Increase/Decrease) c. U? (Increase/Decrease) D. Recessionary Gap/Inflationary Gap?

4. The price of steel has increased due to shortage of iron ore. Diagram:

E. Which curve (SRAS/AD)? F. Which way (L/R)? G. Effect on a. Peq? (Increase/Decrease) b. Qeq? (Increase/Decrease) c. U? (Increase/Decrease) H. Recessionary Gap/Inflationary Gap?