Tackle the Test: Free-Response Questions

1. Question

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   Assume the central bank increases the quantity of money by 25%, even though the economy is initially in both short-run and long-run macroeconomic equilibrium. Describe the effects, in the short run and in the long run (giving numbers where possible), on the following:

   Rubric for FRQ 1 (8 points)

   1 point: Aggregate output rises in the short run.

   1 point: Aggregate output falls back to potential output in the long run.

   1 point: The aggregate price level rises in the short run (by less than 25%).

   1 point: The aggregate price level rises by 25% in the long run.

   1 point: The real value of the money supply increases in the short run.

   1 point: The real value of the money supply does not change (relative to its original value) in the long run.

   1 point: The interest rate falls in the short run.

   1 point: The interest rate rises back to its original level in the long run.

2. Question

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   Draw a correctly labeled graph of aggregate demand and aggregate supply showing an economy in long-run macroeconomic equilibrium.