Handout on Macroeconomic Problems

Dr. Claudia Strow

Econ 203

I. Graph the economy moving from full employment to a recessionary gap, inflationary gap, and stagflation in
the areas below.

Recessionary Gap Inflationary Gap Stagflation

I. In each of the following cases, explain whether AD or AS would shift and in which direction. Assume that
the economy initially begins at full employment equilibrium. Then label the situation as a recessionary gap,
inflationary gap, or stagflation or no problem. Finally, explain what would happen to RGDP, price levels, and
unemployment.
AD or AS Macro situation PLevel RGDP Unemp.
1. Consumer confidence rises once economic AD↑ inflationary gap ↑ ↑ ↓
indicators are released for the 4th quarter
.

2. The US decreases exports of Beef AD↓ recessionary gap ↓ ↓ ↑

3. Many state governments decreases spending AD↓ recessionary gap ↓ ↓ ↑

on secondary education due to budget
problems

4. The stock market rises quickly AD↑ inflationary gap ↑ ↑ ↓

5. Oil prices rise due to US involvement in AS↓ stagflation ↑ ↓ ↑

Iraq

6. New productive knowledge makes factories more AS↑ no problem ↓ ↑ ↓

productive in a number of industries

II. On the back of this worksheet, graph the adjustment process (from the macroeconomic problem in the above
3 graphs back to full employment equilibrium) if no government intervention occurs.