APMacro: Practice FRQ


FRQ_Icon

Assume that a country’s economy is operating at less than full employment. Draw a correctly labeled graph of aggregate demand and aggregate supply, and show the current output and price level. Assume that policy makers take no policy action and that prices and wages are flexible. Explain what will happen to short-run aggregate supply and employment. Now assume that instead of taking no policy action, the government implements a special tax incentive to encourage individuals to increase saving for retirement. Draw a correctly labeled graph of the loanable funds market. Show how the real interest rate is affected. Given your answer, explain how aggregate supply is affected in the long run.

Arrows-02-june

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