Comments on Problem Set #4

On problem 2

For each part:

i. involves a shift in AD to a short run equilibrium away from Long Run AS.

ii. involves a government policy (fiscal or monetary) to shift AD back to
where it was before (i) happened (and return to long run equilibrium)

iii. involves government NOT doing anything but letting the input prices
adjust (up or down) and ulitmately move short run AS so that the economy
returns to long run equilibrium.

Make sure your cuve shifts and arguments are accurate.

You should find that parts A and B are opposites. That is what you figure
out for A, the opposite happens for B.

You should have at least one diagram for A and one diagram for B. I say at
least because for each part (i, ii, and iii) there is a curve shifting. One
diagram could get busy. I would suggest that you draw 2 diagrams for A and
2 diagrams for B. Note how the problem is set up. An event (i) happens.
Then either we employ policy (ii) or leave it to self adjust (iii). So
draw one diagram showing the policy intervention after (i) happens, then
draw another diagram showing the leave-it-alone (laissez faire, classical)
adjustment after (i) happens.