SOLVED

31) At a short-run macroeconomic equilibrium, real GDP is always equal to potential GDP. 32) Stagflation occurs when aggregate supply and aggregate demand both increase. 33) A decrease in government spending will result in a decrease in the price level and a decrease in real GDP in the long run. 34) Using aggregate demand and aggregate supply, explain what happens in the short run if the Federal Reserve lowers interest rates in the economy? Be sure to detail what happens to aggregate demand, the price level, the level of GDP, and unemployment. Assume that the economy is at full employment before the interest rate decrease. 35) Explain how the economy moves back to full employment from recession. Be sure to detail what happens to short-run aggregate supply, unemployment, equilibrium GDP and the price level. 36) Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in wealth. 37) Beginning with long-run equilibrium, use the aggregate demand and aggregate supply model to illustrate what happens in the short run when the economy suffers a negative supply shock. 38) Using the aggregate supply and demand model, illustrate what happens in the long run when the economy suffers a supply shock. Begin your analysis by assuming the economy has suffered the supply shock in the short run, but has not yet adjusted to it in the long run.