var imagesXXlarge = "krugmanapecon2e_mod32_fig-03,krugmanapecon2e_mod32_fig-04,,"; var imagesXlarge = ",,,"; var imagesLarge = "krugmanapecon2e_mod32_fig-01,krugmanapecon2e_mod32_fig-02,krugmanap2e-ch32-fig-4,,,"; var imagesSmall = "krugmanap2e-ch32-fig-5,,,,,"; var imagesMedium = ",,,,"; xBookUtils.showAnswers['krugmanapecon2e_mod32_cyu_1a'] = "A 5% increase in the money supply will cause a 5% increase in the aggregate price level in the long run. The process begins in the short run, when the larger money supply decreases the interest rate and promotes investment spending. Investment spending is a component of aggregate demand, so the increase in investment spending leads to an increase in aggregate demand, which causes real GDP to increase beyond potential output. The resulting upward pressure on nominal wages and other input prices shifts aggregate supply to the left until a new long-run equilibrium is reached. Although real GDP returns to its original level, both the increase in aggregate demand and the decrease in aggregate supply cause the aggregate price level to increase. The end result is 5% more money being spent on the same quantity of goods and services, which could only mean a 5% increase in the aggregate price level."; xBookUtils.showAnswers['krugmanapecon2e_mod32_cyu_2a'] = "A 5% increase in the money supply will have no effect on the interest rate in the long run. As explained in the previous answer, a 5% increase in the money supply is matched by a 5% increase in the aggregate price level in the long run. Changes in the aggregate price level, in turn, cause proportional changes in the demand for money. Thus, a 5% increase in the aggregate price level increases the quantity of money demanded at any given interest rate by 5%. This means that at the initial interest rate, the quantity of money demanded rises exactly as much as the money supply, and the new, long-run interest rate is therefore no different from the initial interest rate. "; xBookUtils.showAnswers['krugmanapecon2e_mod32_fr_2_rubric'] = "
Rubric for FRQ 2 (6 points)
1 point: Graph with “Price level” or “Aggregate price level” on the vertical axis, “Real GDP” on the horizontal axis, a downward-sloping aggregate demand curve, and an upward-sloping aggregate supply curve
1 point: A vertical long-run aggregate supply curve and equilibrium of aggregate demand and short-run aggregate supply at a point on the longrun aggregate supply curve
1 point: Rightward shift of the aggregate demand curve
1 point: The higher money supply leads to a lower interest rate, which increases investment spending (and consumer spending) and, in turn, aggregate demand. Thus, the aggregate demand curve shifts to the right, creating a new equilibrium price level and real GDP.
1 point: Leftward shift of the short-run aggregate supply curve
1 point: The higher price level and production beyond potential output cause wages to rise over time, shifting short-run aggregate supply to the left. This brings the equilibrium level of real GDP back to potential output, but at a higher price level than before.
";