Questions (Understanding and Application)
(TAs will go over these questions with you during recitation. You should use graphs to help
you answer the questions if appropriate, but you do not need to submit them.)
1. Assume that South Korea began 2020 at long-run macroeconomic equilibrium. Using
an AS/AD graph, illustrate the starting equilibrium and label it A. Illustrate the effect
of consumers deciding to remain at home. Label the new short-run macroeconomic
equilibrium B. What happened to output, unemployment, and inflation? You may
describe your graph instead of submitting it.
The GDP/output falls, which causes unemployment to rise, and inflation
decreases.
2. Starting from point A, illustrate the impact of the rise in net exports. Label the new
short-run macroeconomic equilibrium B. What happened to output, unemployment,
and inflation? You may describe your graph instead of submitting it.
If the net exports rise, the aggregate demand rises and the graph would
shift to the right. As a result, GDP would rise, which causes unemployment
to fall, and inflation to increase.
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Week 9 Recitation Assignment – Business Cycles
3.
Starting from point B, illustrate the impact of the increased government spending
and reduced interest rates. Label the new short-run macroeconomic equilibrium C.
What happened to output, unemployment, and inflation? You may describe your
graph instead of submitting it.
Since government spending is part of the AD equation, an increase in
government spending would cause an increase in aggregate demand, which
causes a rise in price level (inflation) and GDP, therefore decreasing
unemployment.
4. How has the LRAS curve changed? Why?
The long run aggregate supply curve has not changed because the land,
labor, capital, and technology have not changed according to the
background information given about the Korean economy.
Questions (Application and Analysis)
(TAs will provide support, but not answers, for these questions during recitation. You
should use graphs to help you answer the questions if appropriate, but you do not need to
submit them.)
5. If the government and central bank had not stepped in, what would have happened
to the Korean economy over time? Your answer should include the movement of
curves and effects on output, unemployment, and inflation.
Since there is no government involvement, there wouldn’t be
government spending, which would cause a sharp drop in the price level
and therefore, a decrease in GDP. This would cause deflation in the
economy. However, the Korean economy would eventually work its way
back to point A from Point B. Then as the economy slowly recovers, the GDP
would slowly increase and unemployment would drop as GDP increases.
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Week 9 Recitation Assignment – Business Cycles
6. The current expectation is that inflation will continue to rise over the next few years.
Starting at point C, show how this would affect the economy. You may describe your
graph instead of submitting it.
The aggregate supply curve would shift to the right because we are
expecting inflation to increase over the next few years. Therefore,
aggregate supply would decrease. This would cause the price level to
increase, indicating further inflation. As a result, GDP decreases and
unemployment rises.
7. Do you think the Korean government should respond to the situation in #6? Why or
why not?
The Korean government can increase government spending to lower
interest rates, which would cause the AD curve to shift to the right and
therefore, returning the economy to equilibrium. As a result of increased
government spending, the GDP would increase, the price level to increase,
and a decrease in unemployment.
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