Price Level LRAS SRAS 125 - 120 E AD, AD, 14 16 Real GDP per Year (S in Trillion

Question

Price Level LRAS SRAS 125 - 120 E AD, AD, 14 16 Real GDP per Year (S in Trillions) 14) In the above figure, if the economy is in equilibrium at E1, then A) the economy is producing below its potential long-run equilibrium at full employment. B) the economy is producing above its potential long-run equilibrium at full employment. C) there is an inflationary gap in the economy. D) the economy is in a period of high inflation. 15) The long-run effect of an increase in the money supply when starting from full employment is to A) increase real GDP only. B) increase the price level only. C) increase both real GDP and the price level. D) increase real GDP as the price level increases too. 16) An appreciation of the U.S. dollar occurs when A) the international price of the dollar falls. (8) the international price of the dollar rises. () the U.S. demand for foreign currencies increases. D) the supply of dollars in international markets increases.

Explanation / Answer

(14) (A)

At point E1, real GDP is $14 trillion which is less than potential GDP of $16 trillion.

(15) (B)

Higher money supply will raise aggregate demand in short run, shifting AD curve right and increasing price level and real GDP. Higher price level will raise cost of input, increasing cost of production, therefore firms will lower supply in long run, decreasing aggregate supply. The short run AS curve will shift left, intersecting new AD and long run AS at the potential GDP but at a higher price level.

(16) (B)

Dollar appreciates when its price in global market increases, so that more number of foreign currencies are needed to buy 1 dollar.

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