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Question :
1. The following events have occurred at times in the history of Australia: (6 marks)
i) A deep recession hits the world economy.
ii) The world oil price rises sharply.
iii) Australian businesses expect future profits to fall.
iv) An increase in demand of Australian mineral.
a. Explain for each event whether it changes short-run aggregate supply, long-run aggregate supply, aggregate demand, or some combination of them.
b. Explain the separate effects of each event on real GDP and the price level, starting from a position of long-run equilibrium.
c. Explain the combined effects of these events on real GDP and the price level.
2. What is the output gap and is it an inflationary gap or a recessionary gap? (2 marks)
3. Initially, in Figure 24.2 the short-run aggregate supply curve is SAS0 and the aggregate demand curve is AD0. Some events change aggregate demand, and later, some other events change aggregate supply. (7 marks)
a. What is the equilibrium after the change in aggregate demand?
b. What is the equilibrium after the change in aggregate supply?
c. Describe two events that could have changed aggregate demand from AD0 to AD1.
d. Explain the separate effects of each event on real GDP and the price level, starting from a position of long-run equilibrium.
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