Use the following information to answer questions a through 11:
The graph below shows the AD-AS diagram for Brazil (see attached file).
Suppose that the economy is initially in long-run equilibrium with the price level of 800.
Now suppose that the Aggregate Demand (AD) curve shifts right from AD1 (blue) to AD2 (green).
What is the new GDP in the short-run as a result of this shift?
What is the new price level in the short-run as a result of this shift?
What is the price level in the new long-run equilibrium as a result of this shift?
What is GDP in the new long-run equilibrium as a result of this shift?
What causes the economy to move from the short-run equilibrium to the new long-run equilibrium?
Problem 2
Suppose the economy is operating at potential GDP, something like was the case for the U.S. in mid-2018. The
unemployment rate has reached historic lows, suggesting that the economy is at full employment. Now
suppose that due to an economic slowdown in Europe, U.S. export sales decline.
Suppose potential GDP occurs where Y = $10,000 billion. Suppose that the marginal propensity to consume is
0.75. If we assume that both taxes and imports are given then the simple expenditure multiplier formula
applies. Suppose exports fall by $100 billion. Use the multiplier formula to estimate the change in GDP.
Suppose further that for every one percentage point that GDP falls below potential, the unemployment rate will
rise by half of one percentage point. How much then will the unemployment rate rise due to the decrease in
exports?
Sample Solution
