Module 9 Assignment: Problem Set — Keynesian and Neoclassical Economics

You can click on the following link to download the problem set for this module: Keynesian and Neoclassical Economics Problem Set.

Keynesian and Neoclassical Economics Problem Set[1] 

1. The graph below shows the AD-AS diagram for Canada.

Aggregate Demand and Aggregate Supply diagram for Canada. The AD y intercept is at (0, 1000) and the x intercept is at (1000, 0). The SRAS y intercept is (0, 400). The LRAS line runs parallel to the y axis through the point 650 on the x axis. The AD and SRAS curves intersect at (300, 700). The AD line intersects the LRAS line at (650, 350) and the SRAS line intersects the LRAS line at (650, 1050).

What type of the GDP gap is observed in Canada (select one)?

a.     There is no recessionary or inflationary gap.
b.     The economy is facing a recessionary gap.
c.     The economy is facing an inflationary gap.

2. The graph below shows the AD-AS diagram for Canada.

Aggregate Demand and Aggregate Supply diagram for Canada. The AD y intercept is at (0, 1000) and the x intercept is at (1000, 0). The SRAS y intercept is (0, 400). The LRAS line runs parallel to the y axis through the point 450 on the x axis. The AD and SRAS curves intersect at (300, 700). The AD line intersects the LRAS line at (450, 550) and the SRAS line intersects the LRAS line at (450, 850).

What type of fiscal policy should the government of Canada be implementing to bring the economy to the long-run equilibrium (select one)?

a.     There is no need for either contractionary or expansionary fiscal policy.
b.     The government should implement expansionary fiscal policy.
c.     The government should implement contractionary fiscal policy. 

3. Suppose that we observe a fall in expected rate of return. Which graph most accurately shows how this would affect the aggregate demand – aggregate supply model? Note that the new curve is shown in gray.

a. AS curve shifts right:
Aggregate supply curve shifts to the right.

b. AD curve shifts right:
Aggregate demand curve shifts to the right.

c. AS curve shifts left:
Aggregate supply curve shifts to the left.

d. AD curve shifts left:
Aggregate demand curve shifts to the left.

Use the following information to answer questions 4 through 6:

The graph below shows the Long-Run Aggregate Supply Curves (LRAS) for Brazil.

Coordinate plane with two lines represented. Both the LRAS Aand LRAS2 lines run parallele to the y axis. The x intercept for LRAS is (100, 0) and the x intercept for LRAS2 is (300, 0).
  1. What event could shift LRAS from LRAS1 (black color) to LRAS2 (red color) in Brazil (select one)?
    1. Increase in capital.
    2. Decrease in labor.
    3. Decrease in human capital.
  1. What event could shift LRAS from LRAS1 (black color) to LRAS2 (red color) in Brazil (select one)?
    1. Increase in fertility rate.
    2. Decrease in labor.
    3. War.
  1. What event could shift LRAS from LRAS1 (black color) to LRAS2 (red color) in Brazil (select one)?
    1. Discovery of new mineral deposits.
    2. Decrease in labor.
    3. Decrease in human capital.

Use the following information to answer questions 7 through 11:

The graph below shows the AD-AS diagram for Brazil.

Aggregate Demand and Aggregate Supply diagram for Brazil. The AD1 y intercept is at (0, 1200) and the x intercept is at (1200, 0). The SRAS1 y intercept is (0, 400). The LRAS line runs parallel to the y axis and the x intercept for LRAS is (400, 0). The AD1 and SRAS1 curves intersect at (400, 800). The AD2 line intersects the LRAS line at (400, 1000) and AD2 intersects SRAS1 at (500, 900).

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).

  1. What is the new GDP in the short-run as a result of this shift?

 

  1. What is the new price level in the short-run as a result of this shift?

 

  1. What is the price level in the new long-run equilibrium as a result of this shift?

 

  1. What is GDP in the new long-run equilibrium as a result of this shift?

 

  1. What causes the economy to move from the short-run equilibrium to the new long-run equilibrium (select one)?
    1. Decreased wages.
    2. Increased prices.
    3. Decreased prices.
    4. Increased wages.

Use the following information to answer questions 12 through 15:

The graph below shows the AD-AS diagram for Brazil.

Aggregate Demand and Aggregate Supply diagram for Brazil. Two sets of AD-AS lines represented by AD1 and AS1, and AD2 and AS2. The LRAS line runs parallel to the y axis and the x intercept is (200, 0). The AD1 y intercept is (0, 1000) and the x intercept is (1000, 0). The AS1 y intercept is (0, 600). AS1 and AD1 intersect at (200, 800). The AD2 y intercept is (0, 800) and the x intercept is (800, 0). The AS2 y intercept is (0, 400). AS2 and AD2 intersect at (200, 600).

Suppose that the economy is initially in long-run equilibrium with the price level of 800 (AD1 and SRAS1).

Now suppose that the federal government decreases spending.

  1. As a result of this event, what is the new short-run price level?

 

  1. As a result of this event, what is the new short-run GDP?

 

  1. As a result of this event, what is the new long-run price level?

 

  1. As a result of this event, what is the new long-run GDP?

 

 

[1] This assignment by Lumen Learning is licensed under a Creative Commons Attribution 4.0 International License. You can access an alternative means to plotting points at https://www.desmos.com/calculator.