Ch. 31: AD/AS Graphing Practice: Key

a. Begin in long run equilibrium b. Government increased military spending. Show and identify results for P

level and GDP. = G goes up = AD shifts right = PL up and GDP up = Inflationary gapWhat about income and employment?

c. What happens to nominal wages in the short run? = Nominal Wages don’t respond in short run

Yf

#1

d. What happens to real wages in the short run? = as PL rises and Nom Wages are sticky, Real Wages decreasee. What will happen to nominal wages in the long run?

= as PL and output continue to rise, Nom Wages eventually rise as well

Yf

f. Explain and show what happens as a result of part e. = All input P have increased and now W increase = Shift Short Run AS left

g. Identify the final results for P level and GDP.

= higher P but back at Yf and increase in Nominal W are offset by increase in P level

Yf

a. Draw and label a graph for the macro economy in long run equilibrium. b. Consumer confidence about the economy is down . Show and identify results for P

level and GDP.= PL decrease, GDP decrease (below full employment levels) = Recessionary GapWhat about income and employment?

c. What happens to nominal wages in the short run? = As GDP and PL fall , Nominal Wages are sticky and don’t respond in short run

Yf

#2

a. What happens to real wages in the short run? = as PL falls and Nom Wages stuck, Real wages rise

e. What will happen to nominal wages in the long run? = As the Long Run nears, Nominal W begin to decrease

f. Explain and show what happens as a result of part e. = All input P have decreased and now W decrease = shift Short Run AS right

g. Identify the final results for P level and GDP. = lower P level but back at Yf, and decrease in Nominal W are offset by lower P levels

Yf