Chapter 14 Money and The Economy : Pre-Class & In-Class Activities Packet Name/I.D. Number: Section: Date: Part 4. Economic Equations and Graphs 1. Which figure below from (a) - (d) best describes each of the following 2. Use the following figure to answer questions A and B below: situations? (Write the letter of the graph in the box) A. Continued inflation due to supply-side factors. [ ] C. One-shot, demand-induced inflation B. Continued inflation due to demand-side factors. [ ]D. One-shot, supply-induced inflation. LRAS SRAS. AD, to AD2: Start AD. to AD2. Economy moves from then follow the arrows. SRAS2 point 1 to 2. LRAS SRAS SRAS, LRAS Price Leve SRAS, SRASS PT ADS SRAS SHAS AD2 Price Level P2 AD, Price Level ON Real GDP AD AD2 AD A. The economy is at point A when there is a one-shot, demand-induced AD AD inflation. Assuming no other changes in the economy, at what point will O Real GDP O Q2 Real GDP the economy settle (assuming the economy is self-regulating). (a) (b) B. The economy is at point A when it is faced with two adverse supply shocks. The Fed tries to counter these shocks by increasing aggregate SPAS, to SPAS2: Start: SPAS, to SPAS! Economy moves from then follow the arrows. demand. What path will the economy follow? point 1 to 2. LRAS LAS SRAS. 3. What does the real interest rate equal given the following? SPAS2 SRASS SRAS, A. Nominal interest rate - 8 %; expected inflation rate = 2 % SEAS2 CRASH P2 B. Nominal interest rate = 4 %; expected inflation rate = -4 % Price Level Price Level AD AD 4. What does the nominal interest rate equal, given the following? AD AD. A. Real interest rate = 3 %, expected inflation rate = 1 % AD. O Real GDP Real GDP B. Real interest rate = 5 %, expected inflation rate - -3 % (c) (d)