Q1 You will use this information for the next two questions: Consider a situatio

Question

Q1

You will use this information for the next two questions:

Consider a situation in which banks, terrified by recent defaults on loans, cut back drastically on who qualifies for home and business lending (this may sound familiar...). In the short run we would see _______ and as we move to the long run we would see ________.

AD left; SRAS left

Q2

In lecture we had three theories explaining the slope of the AD curve via its components. Which of the following components of AD was NOT used by one of these theories?

Explanation / Answer

Q1. As default on loan inceases, interest rate for loans will increase, which will lead to decrease in income of the consumer for this reason consumer spending will fall.And ultimately real GDP will fall, so AD curve shifts to the right.

And to compensate the fall in real GDP short run AS will shift to the right in the long run to maintaing the equilibrium real GDP.

So, In the short run we would see AD left and as we move to the long run we would see SRAS right.

Q2. Generally, government expenditure does not used to explaining the slope of AD curve.

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