MGEC06-Sample Test1 solution.pdf

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Economics for Management Studies
Victor Yu

UNIVERSITY OF TORONTO SCARBOROUGH DEPARTMENT OF MANAGEMENT MGEC06TOPICS IN MACROECONOMCS THEORY Sample Test1 Solutions Ata Mazaheri Instructions This is a closed book testYou have 2 Hours Good LuckLast Name First NameID FOR MARKERS ONLYQ1 Q2 Q3 Q4 Total MarksEarned Maximum 40 20 20 20 100 Marks Possible Page 1 of 13 Answer all following questionsQuestion1 40 Points Answer the following questionsa 5 Points Use a DADDAS curve diagram to illustrate the shortrun and longrun effect of an unexpected positive demand shock that lasts three years on output price level unemployment rate and inflation rate SolutionCDAS B AD Y DADY A positive demand shock that lasts for three periods will shift DAD to the right DAD stays there as log as the shock lastthree periods and then returns to its original position In the first three periods while the positive demand shock persists the DAS adjusts up reflecting the inflationary gap But when the demand shock dissipates the DAS starts adjusting downwards reflecting the deflationary gap Eventually the economy returns to its original long run equilibriumPage 2 of 13
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