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What is the goal or purpose of the AD/AS model? Why is this goal important to economists? Why is this goal relevant to this course?

  1. What is the goal or purpose of the AD/AS model? Why is this goal important to economists? Why is this goal relevant to this course?
  2. Answer the following questions (A, B, and C) using the AD/AS model. Find the changes in the equilibrium.
  • Problem A:Suppose there is a decrease in real estate prices around the country. Since most consumers' "wealth" comes from the value of their home, real wealth drops.
  • Which curve shifts as a result of this event?
  • What happens to the equilibrium price level (P), GDP (Y) and unemployment (u) in the short-run?
  • What happens to the equilibrium price level (P), GDP (Y) and unemployment (u) in the long-run?

  • Problem B:Suppose a major drought hits the Midwest and devastates this year's crop.
  • Which curve shifts as a result of this event?
  • What happens to the equilibrium price level (P), GDP (Y) and unemployment (u) in the short-run?
  • What happens to the equilibrium price level (P), GDP (Y) and unemployment (u) in the long-run?

  • Problem C:Suppose oil prospectors discover a previously unknown reserve of oil in California.
  • Which curve shifts as a result of this event?
  • What happens to the equilibrium price level (P), GDP (Y) and unemployment (u) in the short-run?
  • What happens to the equilibrium price level (P), GDP (Y) and unemployment (u) in the long-run?

  1. Based off of what we know about the current state of the US economy, if we were to use the AD/ AS model to explain it, what curve(s) is/ are shifting and why? Why is the AD/AS model the best tool for answering this question?

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