Exam 9: The IS-LMAD-AS Model: A General Framework for Macroeconomic Analysis

The long-run aggregate supply curve

When SRAS is horizontal, it implies that

Suppose the economy is initially in long-run equilibrium. For each of the shocks listed below, explain the short-run effects on output and the price level. a. A stock market crash reduces consumers' wealth. b. Businesses decide to hold larger inventories. c. The government cuts defense spending. d. Foreign countries buy more Canadian goods.

For each of the following changes, what happens to the real interest rate and output in the very short run, before the price level has adjusted to restore general equilibrium? a. Wealth declines. b. Money supply declines. c. The future marginal productivity of capital declines. d. Expected inflation rises. e. Future income rises.

Draw a saving-investment diagram to show how each of the following changes shift the IS curve. a. Future income declines. b. The future marginal productivity of capital declines. c. Government purchases increase temporarily. d. The effective corporate tax rate declines.

An adverse supply shock that is permanent shifts which curve in addition to the curves shifted by one that is temporary?

The IS curve shows the combinations of output and the real interest rate for which

What adjusts to restore general equilibrium after a shock to the economy?

Which of the following changes shifts the AD curve to the left?

The vertical LRAS implies that

You have just read that Australia has suffered a drought, destroying its wheat crop for this year. The effect of this adverse supply shock on Australia would probably be

Which of the following changes shifts the SRAS curve up?

Which market adjusts the most quickly in response to shocks to the economy?

A change that increases real money demand relative to the real money supply causes

An increase in expected inflation causes the real interest rate to ________ and output to ________ in the short run, before prices adjust to restore equilibrium.

The aggregate demand curve shows

Suppose the intersection of the IS and LM curves is to the right of the FE line. What would most likely eliminate a disequilibrium among the asset, labour, and goods markets?

For each of the following changes, which equilibrium curve (IS, LM, or FE) is shifted? Draw the change in the underlying demand or supply curves (for example, money demand and supply for the LM curve) and show how the equilibrium curve changes. a. Expected inflation increases. b. The future marginal productivity of capital increases. c. Labour supply decreases. d. Future income declines. e. There's a temporary beneficial supply shock. f. The nominal interest rate on money rises.

Suppose the intersection of the IS and LM curves is to the right of the FE line. An increase in the price level would most likely eliminate a disequilibrium among the asset, labour, and goods markets by

The FE line is vertical because the level of output at full employment doesn't depend on the