When answering these questions, SHOW YOUR WORK. Full credit will not be given unless
you do so.
Each of the questions below is worth up to 15 extra points.
1. Use the AS/AD model to
a. Demonstrate graphically and explain verbally the situation the US economy is currently in.
b. In the diagram you drew for part (a) above, show the impact the Obama administration
stimulus package is designed to have on the economy.
c. Discuss how knowing the exact value of potential income/output will impact your answers to
(a) and (b) above. NOTE: You do not need to draw any more diagrams here.
2. Consider an economy characterized by the following AE equation: AE = 4000 + 0.8Y.
a. Compute the equilibrium level of Y and illustrate the equilibrium in an AE/AP diagram.
b. Suppose autonomous investment increased by 300. Illustrate the impact of this change in the
diagram you drew for part (a) above. NOTE: Be sure to compute the new equilibrium level of Y
and include it in your diagram.
c. Correctly link up your diagram for (a) and (b) above to an AS/AD diagram. Be sure to
completely label your AS/AD diagram. HINT: Try to recall your instructor’s favorite chapter 10
diagrams – Figures 10-10A and 10-10B.