Question

Aggregate Supply and Aggregate Demand Graphing Practice (Part 2) ease graph each of the following scenarios using an AS/AD diagram. Please be orough and label all graphs correctly, and answer each of the adjoining questions. 1. The United States economy is operating at full employment at the same time the European Union unexpectedly goes into recession. 5 points a. Show how this would impact the US economy. b. Is the US now operating above, or below, full employment? c. Is this an inflationary gap, or a recessionary gap? d. What happened to the unemployment rate as a result? 2. The US economy is operating at its natural rate of unemployment when oil prices suddenly fall. 5 points a. Show how this would impact the US economy. b. Is the US now operating above, or below, full employment? c. Is this an inflationary gap, or a recessionary gap? d. What happened to the unemployment rate as a result? 3. Germany's economy is operating at full employment when the US economy goes into recession. 5 points a. Show how this would impact Germany's economy. b. Would Germany now be operating above, or below, full employment? c. Would Germany now have an inflationary gap, or a recessionary d. What would happen to Germany's unemployment rate? 4. The United States economy is operating at full employment when the Fed announces a decrease in the supply of money, 5 points a. Show how this would impact the US economy. b. Is the US now operating above, or below, full employment? c. Is this an inflationary gap, or a recessionary gap? d. What happened to the unemployment rate as a result?

Answer 1

In scenario 1, the US economy is impacted negatively by the European Union's recession, leading to a decrease in real GDP and higher unemployment. In scenario 2, lower oil prices have a positive impact on the US economy, increasing real GDP and decreasing unemployment. In scenario 3, the US's recession negatively impacts Germany's economy, leading to a decrease in real GDP and higher unemployment.

Step-by-step explanation:

In scenario 1, when the European Union goes into recession while the US economy is operating at full employment, it would impact the US economy negatively. The decrease in European demand for US goods and services would lead to a decrease in US exports, leading to reduced aggregate demand (AD). As a result, the US would experience a decrease in real GDP and higher unemployment, operating below full employment. This is a recessionary gap.

In scenario 2, when oil prices suddenly fall while the US economy is operating at its natural rate of unemployment, it would impact the US economy positively. Lower oil prices lead to lower input costs, which leads to a decrease in production costs and an increase in aggregate supply (AS). As a result, there will be an increase in real GDP and a decrease in unemployment, operating above full employment. This is an inflationary gap.

In scenario 3, when the US economy goes into recession while Germany's economy is operating at full employment, it would impact Germany's economy negatively. The decrease in US demand for German goods and services would lead to a decrease in German exports, leading to reduced aggregate demand (AD). As a result, Germany would experience a decrease in real GDP and higher unemployment, operating below full employment. This is a recessionary gap.

In scenario 4, when the Fed announces a decrease in the supply of money while the US economy is operating at full employment, it would impact the US economy negatively. The decrease in the money supply leads to higher interest rates, which reduces investment and consumption spending, leading to a decrease in aggregate demand (AD). As a result, there will be a decrease in real GDP and an increase in unemployment, operating below full employment. This is a recessionary gap.