Unit 3 FRQ Test. National Income and Price Determination The economy is operating at full employment.MPC=.90. a) Draw the AD, SRAS and LRAS graphs. Label full run output and price level Qy and PLy. Label all parts of the model. b) Canada, a major trading partner, their economy is in a recession, income is decreasing. i) Draw the change in the model based on this information. ii) What happens to PL, output and unemployment? C) In the long run, what will happen to the economy? i) Draw the shift based on the long run situation ii) What was the reason the shift or change occurred. 2) The economy is operating at more than full employment. MPC =.75. The current level of output Is $1T (1000B). The full employment output is $800B a) Draw the AD, SRAS and LRAS graphs. Label full run output Qy. Label current equilibrium PL1 and Q1 Label all parts of the model. b) If nothing is done, what will happen to the economy in the long run? i) Draw the change/shift based on the long run situation ii) What was the reason the shift or change occurred C) Suppose the government does not want to wait for the long run and needs to do something i) What are the 2 tools of fiscal policy? ii) What is the amount of government spending that is required to close the gap? Is it an increase or decrease? Show your work iii) If the government decides to use taxes instead, how much will the government have to change taxes? Is it an increase or decrease? iv) Is the amount of taxes changed larger, smaller or the same as the change in government spending? Why? 3) The economy is operating at less full employment. MPC =.80. The current level of output Is $600B. The full employment output is $$900B a ) Draw the AD, SRAS and LRAS graphs. Label full run output Qy. Label current equilibrium PL1 and Q1 Label all parts of the model. b) If nothing is done, what will happen to the economy in the long run? i) Draw the change/shift based on the lona run situationc) Suppose the government does not want to wait for the long run and needs to do something. i} What are the 2 tools of scal policy? ii} What is the amount of government spending that is required to close the gap? Is it an increase or decrease? Show your work iii} Ifthe government decides to use taxes instead, how much will the government have to change taxes? Is it an increase or decrease? iv} Is the amount of taxes changed larger, smaller or the same as the change in government spending? Why? 4} Assume the economy of Sweden is in longrun equilibrium. MPG 2 J5 {a} Draw a correctly labeled graph of shortrun aggregate supply, longrun aggregate supply, and aggregate demand curves for Sweden, and show the current equilibrium real output, labeled Y1, and the current equilibrium price level, labeled PL1. {b} Assume the United Kingdom decreases its imports from Sweden. On your graph in part {b}, show the new equilibrium real output, labeled Y2, and the new equilibrium price level, labeled PL2, as a result of this change. (c) As a result of the decrease in the United Kingdom's imports from Sweden, would policy makers in Sweden be more concerned about cyclical unemployment or inflationary pressures in the short run? Explain. (d) If the Swedish government's goal is to return the economy to long-run equilibrium, what are two fiscal policy options? (e) If the gap is $200B and MPC is above, how much would Sweden have to change government spending to close the gap? Show your work. Is it negative or positive change? (f) If the gap is $200B and MPC is above, how much would Sweden have to change taxes to close the gap? Show your work. Is it negative or positive change? (9) Is the change in taxes larger, smaller or the same as the change in government spending? Why? Or if you choose, is a change in government spending or taxes more effective/powerful. Explain your answer.5} Assume Smithland is in shortrun equilibrium at a level ofoutput that exceeds the full-employment level of output. {a} Draw a correctly labeled graph of the aggregate demand, shortrun aggregate supply, and longrun aggregate supply curves, and show each of the following. (i) The current equilibrium real output and price level, labeled Y1 and PH, respectively {ii} The fullemployment output, labeled YF (b) Assume Smithland's government cuts individual income taxes. On your graph in part {a}, show the shortrun effect of the tax cut on equilibrium real output, labeling the new shortrun equilibrium real output Y2. {c} Based solely on the change in real output on your graph in part {b}, what will happen to each of the following in the short run? {i} The natural rate of unemployment {ii} Nominal interest rates. Explain