econ 203 question 3 lab 3

Question 3 [16 points] AD: P = 170 - 0.1Y Suppose research has uncovered the following aggregate demand and supply functions for an economy: AS: P = 50 + 0.1Y a) Draw the AD and AS functions to illustrate the short-run equilibrium real GDP and price. AD 270 240- 210- 180 Price level 150 120- 90 60+ 30 + 400 800 1200 1600 2000 2400 Reset Real GDP b) What are the short-run equilibrium values for real GDP and the price level from the graph above? Let us also assume that this short run equilibrium is also the long run equilibrium, that is, Y=Yp. Real GDP = 0 Price level = 0 c) Suppose a rise in demand for new houses increased the investment component aggregate expenditure, and increased AD at each price level by 200. Draw the new AD curve in the graph above. d) Complete the following paragraph. To conclude, the rise in AD due to increased the investment component aggregate expenditure will create a/an (select one) gap, which will cause unemployment to (select one) relative to the natural rate. If the government wants to close this gap, it should (select one) government spending and (select one) taxes. If the central bank wants to close this gap, it should (select one) interest rates. If neither the government nor the central bank responds to the gap, input costs such as wages will eventually (select one) and the (select one) will shift to the (select one) to close the gap. This process, however, may take a very long time to complete