Microsoft Word - Document1 Price Level LRAS SRAS1 XXXXXXXXXX SRAS2 XXXXXXXXXXE1 1.0 XXXXXXXXXXE2 AD $1 trillion $2 trillion Real Output Short Run Equilibrium E1: • Real Output: $1 trillion • Output...

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Microsoft Word - Document1 Price Level LRAS SRAS1 3.0 SRAS2 2.0 E1 1.0 E2 AD $1 trillion $2 trillion Real Output Short Run Equilibrium E1: • Real Output: $1 trillion • Output Gap: negative $1 trillion • Price Level: 2.0 • Expected Input Prices: 3.0 • Unemployment: above the Natural Rate of Unemployment (since output gap is negative) Long Run Equilibrium E2: • Real Output: $2 trillion (Natural Level of Output) • Output Gap: $0 • Price Level: 1.0 • Expected Input Prices: 1.0 • Unemployment: Natural Rate of Unemployment Principles of Macroeconomics ECN-120 ATW302 Spring 2020 Homework #5 Due: Monday April 6, 2020 at 11:59pm Name: __________________________ Price Level LRAS 3.0 SRAS1 2.0 AD2 1.0E1 AD1 $3,000 $4,000 $5,000$6,000Real billion billion billion billionOutput In the graph above, suppose the economy starts at the long run equilibrium E1 where: · The price level is at 1.0 (i.e. the price level of final goods and services is at 1.0) · The expected input price is at 1.0 · Real output is at the natural level of output at $3,000 billion · The unemployment rate is at the natural rate of unemployment Then, because of a change in government policy lowering taxes, the Aggregate Demand curve shifts to the right to AD2. 1. Label the new short run equilibrium E2 on the graph above. Then fill in the following: (5 points) a. Price level of final goods and services at E2: b. Expected input price at E2: c. Real output at E2: d. Is the output gap positive or negative at E2? e. Is the unemployment rate above or below the natural rate of unemployment at E2? 2. The economy cannot remain at the short run equilibrium E2. Why not? (3 points) 3. Shift the appropriate curve on the graph above, label it, and label the new short run equilibrium E3. Then fill in the following: (5 points) a. Estimate the price level of final goods and services at E3: b. Expected input price at E3: c. Estimate the real output at E3: 4. The economy also cannot remain at the short run equilibrium E3. Shift the appropriate curve to return the economy to a long run equilibrium, label it, and label the new long run equilibrium E4. Then fill in the following: (7 points) a. Price level of final goods and services at E4: b. Expected input price at E4: c. Real output at E4: d. What term do we use for the real output at E4? e. What term do we use for the unemployment rate at E4?