Shifting the Short-Run Aggregate Model

4. Draw a correctly labeled graph depicting an economy in equilibrium at full-employment GDP. Show the effect in the short-run when consumer spending skyrockets.

What type of gap is created?

5. Draw a correctly labeled graph depicting an economy in equilibrium at full-employment GDP. Show the effect in the short-run when national energy prices increase.

What type of gap is created?

6. Draw a correctly labeled graph depicting an economy in equilibrium at full-employment GDP. Show the changes that would occur in the short-run when a trading partner has a recession.

What type of gap is created?

7. Draw a correctly labeled graph depicting an economy in equilibrium at full-employment GDP. Show the changes that would occur in the short-run when productivity increases.

What type of gap is created?

Fiscal Policy

8. Explain the difference between discretionary and non-discretionary fiscal policy and the difference between expansionary and contractionary fiscal policy.

9. Draw 2 graphs. Use aggregate demand, aggregate supply, and LRAS to show a negative output gap on one, and a positive output gap on the other. Graph how both graphs would shift if fiscal policy were used to close the gaps.

1. Explain how fiscal policy can be used to close each gap using the following information:
2. If the MPC is .8 and the gap they were trying to close was $200 billion, how much should they change government spending by?
3. What if they instead wanted to close the gap through taxes?

10. Draw 2 graphs. Use aggregate demand, aggregate supply, and LRAS to show a positive output gap on one and a negative output gap on the other. Draw and explain what happens to both graphs in the long-run without government intervention.