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Suppose that the price level in the economy of Zap as described in problem 1 is $100 .$ The economy is also at full employment. a If the government of Zap increases...

Question

Suppose that the price level in the economy of Zap as described in problem 1 is $100 .$ The economy is also at full employment. a If the government of Zap increases its expenditures on goods and services by $€ 10$ billion, what happens to the quantity of real GDP demanded? b How does Zap's aggregate demand curve change? Draw a two-part graph that is similar to Figure 25.9 to illustrate the change in both the $A E$ curve and the $A D$ curve. $\mathrm{C}$ In the short run, does equilibrium re

Suppose that the price level in the economy of Zap as described in problem 1 is $100 .$ The economy is also at full employment. a If the government of Zap increases its expenditures on goods and services by $€ 10$ billion, what happens to the quantity of real GDP demanded? b How does Zap's aggregate demand curve change? Draw a two-part graph that is similar to Figure 25.9 to illustrate the change in both the $A E$ curve and the $A D$ curve. $\mathrm{C}$ In the short run, does equilibrium real GDP increase by more than, less than or the same amount as the increase in the quantity of real GDP demanded? d In the long run, does equilibrium real GDP increase by more than, less than or the same amount as the increase in the quantity of real GDP demanded? e In the short run, does the price level in Zap rise, fall or remain unchanged? f In the long run, does the price level in Zap rise, fall or remain unchanged?



Answers

The economy is in a recession with high unemployment and low output.
a. Draw a graph of aggregate demand and aggregate supply to illustrate the current situation. Be sure
to include the aggregate-demand curve, the short-run aggregate-supply curve, and the long-run aggregate-supply curve.
b. Identify an open-market operation that would restore the economy to its natural rate.
c. Draw a graph of the money market to illustrate the effect of this open-market operation. Show the
resulting change in the interest rate.
d. Draw a graph similar to the one in part a to show the effect of the open-market operation on output
and the price level. Explain in words why the policy has the effect that you have shown in the
graph.


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