Economics s350k
Summer 2014
Practice Problem Set 5
1. Why does the SRAS slope upward? What causes the SRAS to shift?
2. Why is the LRAS vertical? What causes the LRAS to shift?
3. Use the AD-AS and IS-MP diagrams to show that monetary and fiscal policy can change output in the short-run, but not in the long-run. How do inflation and interest rates change in the SR and LR in each case?
4. Use an AD-AS diagram to show how inflation and output adjust in the short-run and long-run in response to an improvement in technology.
5. Use an AD-AS diagram to show how inflation and output adjust in the short-run and long-run in response to an oil price shock.
6. Is the economy self-correcting? Explain.
7. Does stabilizing the inflation rate stabilize the economy? Explain (for AD shocks, SRAS shocks, and LRAS shocks).
8. What is the Phillips curve? How have views about the Phillips curve changed over time?
