ECON 351 HW 11 – The persistent negative GDP gap

Subject: Economics / General Economics
Question
HOMEWORK #11 (25 points total)
Economics 351 online Read these instructions carefully! Carefully answer each of the questions below.
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o 1 1) The graph below show the persistent negative GDP gap in the US following the Great
Recession Draw a aggregate supply and aggregate demand graph depicting point A where we are
in general equilibrium (the AD, SRAS, and LRAS all intersect at point A where real
GDP equals potential GDP. Label these three curves with a subscript A. (10 points for
a correct and completely labeled graph)
a) (5 points) We know that during the Great Recession the US experienced adverse
shocks to the SRAS as well as to the AD curve. Please list separately the factors
that caused the adverse shocks to SRAS and AD respectively.
Show how these shocks map to your AS-AD diagram and label as point B and the
associated AS – AS curves with a subscript of B.
b) (5 points) Now explain how the self correcting mechanism along with the effects
of a persistent negative GDP gap is ‘supposed’ to get the economy back to
potential as in point C on the graphic above. Please label as point C on your
diagram.
c) c) (5 points) Now offer an explanation as to why the economy has not self
corrected and thus, the negative GDP gap persists as in point D in the graphic
above. Don’t worry about labeling point D on your graph. 2 3

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