National Income & Price Determination unit test
A test on this unit alone, marked as a percentage and a letter grade — for the test your class is actually sitting, rather than for May. Answer everything, then submit once: seeing the answer to question 3 before attempting question 4 makes the final percentage meaningless.
Why stagflation defeats demand policy
Why SRAS slopes up
Shifters of SRAS
The interest-rate effect behind AD
Why the multiplier is smaller in practice
Why AD slopes down is NOT substitution
Why self-correction is slow downward
Why a deficit widens with no policy change
Spending multiplier
Using a multiplier on the exam
What shifts LRAS
Automatic stabilizers
Short answer 1. Define or explain: Interest-rate effect
3 ptsShort answer 2. Define or explain: Marginal propensity to consume (MPC)
3 ptsShort answer 3. Define or explain: The three fiscal policy lags
3 ptsShort answer 4. Define or explain: Policy versus self-correction, same output
3 ptsFree response
10 ptsLONG QUESTION. The economy of Micanapy is in short-run equilibrium and is experiencing an inflationary gap. The banking system in Micanapy has LIMITED reserves.
A. Draw (describe) a correctly labeled graph of the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves for Micanapy, showing (i) the current equilibrium real output and price level, labeled Y1 and PL1, and (ii) the full-employment real output, labeled YF.
B. Assume that policymakers take no action to close the inflationary gap. Explain how Micanapy’s economy will self-adjust to full employment in the long run.
C. Suppose instead that Micanapy’s central bank uses monetary policy to close the inflationary gap in the short run. (i) Identify a specific open-market operation the central bank would implement. (ii) Draw (describe) a correctly labeled graph of the money market in Micanapy, and show the effect of that operation on the nominal interest rate.
D. Based solely on the interest rate change shown in part C(ii), will each of the following increase, decrease, or remain the same in the short run? (i) International financial capital flows into Micanapy — explain. (ii) The price of previously issued bonds in Micanapy. (iii) Private domestic investment spending in Micanapy.
E. Based solely on the change in private domestic investment spending identified in part D(iii), will the unemployment rate in Micanapy increase, decrease, or remain the same in the short run? Explain.