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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?
- 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?
- 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?
- 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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