ECON 2010 : ECON 2010 FINAL EXAM QUESTIONS
Document Summary
; incr: incr, ; not change, incr. Use an ad-as diagram to show the short-run and long-run effects on output and the inflation rate: when the fed raises its inflation target, it will engage in a monetary easing. This will shift the ad curve to the right causing output and inflation to rise in the short-run. If the government takes no action (due to legislative delays), inflation will fall and output will rise from. Y1 to y* as the as curve shifts to the right and the economy is back to producing at potential output level y* (e to g). In 18 months, by the time the tax cut is introduced, the economy is already at full employment. The tax cut will shift the ad curve to the right, and will cause the economy to overshoot full employment, leading to an expansionary gap at the new, higher output: an economy is initially in recession.
