A. King
ECON 2105
Fall 2002
Practice Problems for AD/AS, Fiscal Policy, and Monetary Policy
1. For each of the following events, determine whether the aggregate demand curve or
the short run aggregate supply curve will shift. Show the shift on a graph and explain
what happens to equilibrium price level and equilibrium RGDP because of the shift.
a) A stock market boom makes people wealthier.
b) A recession overseas causes foreigners to buy fewer US goods.
c) Oil prices rise.
d)The government implements several new programs thereby increasing its
spending.
e) A technological improvement raises productivity.
2. Consider your answers in number 2. For each scenario in which AD shifted, tell if the
shift occurred because of changes in C, I, G, (X-M).
3. Name the two tools of fiscal policy.
4. Assume that the US economy is in recession. Using an AD/AS graph explain the
situation the US economy is facing (i.e., a recession) (hint would you more likely have a
deflationary or an inflationary gap in a recession?) and then explain how fiscal policy can
fix the problem. Be sure to show the result of the fiscal policy graphically. (Hint: You
won’t have any actual numbers here. Show where the economy is currently operating
and where we (policymakers and citizens of the US) would like for it to be operating and
then show where we should end up if the stimulus package (fiscal policy) works
correctly.)
5. Asssume that the US economy is in recession.
a) Who is in charge of monetary policy?
b) What are the policy tool options for doing monetary policy to fix a recession?
c)Explain how monetary policy can fix the recession/deflationary gap. You will need to
explain in words and use an AD/AS graph as well the graph for the market for money to
show the effect of monetary policy.
6. Using an AD/AS graph, depict an inflationary gap. What are the two fiscal
policy options that the government has to correct an inflationary gap? What are
the policy options for fixing the inflationary gap with monetary policy? Of the
three monetary policy options, which of the 3 is most likely to be used? Are these
fiscal and monetary policies expansionary or contractionary policies?