J. Explain how SR macroecon Equil. may occur at a level above or below full emp.

Question 1

SR full emp above equil; Economic expansion

Answer 1

Economic expansion;Agg. D have grown faster than LRAS = upward pressure on prices>inflation as general price level increases from P1 to P*

Question 2

SR full emp below equil; recession

Answer 2

Recession;Recessionary gay;Output gap = downward pressure on money wages and resource prices that will decrease the equilibrium price level from P1 to P*

Question 3

Why do levels of emp. vary?

Answer 3

Changes in the MS cause changes in the Agg. D drive the business cycles.

+MS, will -% and +Agg.D through +consumption expensitures of durable goods (as the cost of consumer credit falls) and + Inv. by business (as the cost of borrowing to invest falls.)

-MS, will +% and -consumption and investment spending

Question 3

Why do levels of emp. vary?

Answer 3

Changes in the MS cause changes in the Agg. D drive the business cycles.

+MS, will -% and +Agg.D through +consumption expensitures of durable goods (as the cost of consumer credit falls) and + Inv. by business (as the cost of borrowing to invest falls.)

-MS, will +% and -consumption and investment spending

Question 4

Why do levels of emp. vary?

Answer 4

Changes in the MS cause changes in the Agg. D drive the business cycles.

+MS, will -% and +Agg.D through +consumption expenditures of durable goods (as the cost of consumer credit falls) and + Inv. by business (as the cost of borrowing to invest falls.)

-MS, will +% and -consumption and investment spending