1.The graph above shows

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1.The graph above shows

the AD/LRAS/SRAS functions for a country.

2.In the short run, wages and prices are sticky due to contracts, but they fully adjust to market conditions in the long run.

3.Marginal propensity to consume is MPC = 0.80

4.Okun’s coefficient equals α = 2.

5.Currently all the markets are in equilibrium.

6.There is no foreign trade and so net exports equal zero.

7.Currently the government purchases equal G = 1,000 units.

8.All the questions refer independently to this baseline scenario.

9.The short run effects of a policy or an event on P and Y are defined as the values of these variables after the AD function shifts but before the SRAS function begins shifting.


1.Investment spending goes down by ΔI = -180. What will be the short-run effects on P and Y?

2. Investment spending goes down by ΔI = -180. What will be the short-run effect on cyclical unemployment rate? What will be the long-run effect on cyclical unemployment rate?By short-run and long-run effects, I mean the new values of the variables after the occurrence of an event. 1701601501401301201101009080706050403020100 9,0009,1009,2009,3009,4009,5009,6009,7009,3009,900 10,000 10,100 10,200 10,300 10,400 10,500 10,600 10,700 10,300 10,900 11,000 11,100


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