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5.9: Exercises for Chapter 5
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- Plot the AD and AS curves in a carefully labeled diagram.
- What are the short-run equilibrium values of real GDP and the price level?
- Add a line to your diagram for Exercise 5.1 to illustrate potential GDP.
- What is the size of any output gap you see in the diagram?
- What is the annual growth in potential output?
- Illustrate the growth in potential output in an AD/AS diagram.
- Aggregate demand is not changed by the change in potential output. Indicate any output gap caused by the change in potential output.
- Suppose a slowdown in the rate of growth of GDP in China cuts Chinese imports of primary products from Westland. Using your AD/AS diagram illustrate and explain your forecast for the effects of this change on the equilibrium GDP and price level in Westland.
- What effect, if any, would a slowdown in GDP growth in China have on employment and unemployment rates in Westland? Explain why.
- What are the short-run equilibrium values for real GDP and the price level?
- Assume potential output is 500 and draw an AD/AS/YP diagram to show the initial short-run equilibrium real GDP, price level and potential output.
- Changes in international market conditions drive up prices for crude oil and base metals. Increased production costs driven by these higher input prices raise the general price level by 5 at every level of output. Write the equation of the new AS curve. What are the new short-run equilibrium real GDP and price level?
- Draw the new AS curve in your diagram for (b). What is the size of the output gap?