Week 5 — Which Curve Moved? Reading the AD–AS Model — Traditional alternative (no AI)

Instructors: publish this instead of the adaptive version if you prefer, and unpublish or delete the adaptive one.

Assignment 5 of the term — solve the linear AD–AS pair, tell a movement along a curve from a shift, read where the price level and real output land after a change, and explain it to someone new to economics.

This week you met the AD–AS model: aggregate demand, short-run and long-run aggregate supply, and the habit of naming the curve, the direction, and the new price level and real output. In this assignment you work four short problems on one small economy, interpret each one, and explain the result to someone who has never studied economics. This week's lecture tutorial, quiz, discussion, and Model Workshop practise the same ideas from other angles.

The task

The linear AD–AS pair is an illustrative dataset constructed for this course (not real data). Real output Y is measured in billions of dollars of real GDP, and the price level P is an index, like the GDP deflator. A radio host says that when a government spends more, "prices go up, so people buy less, so the economy ends up making less." Your job is to check that claim the way an economist would, by solving the model, separating a movement along a curve from a shift, and reading where the economy lands.

Work these four problems, showing your arithmetic:

1. Aggregate demand is P = 20 − Y⁄100 and short-run aggregate supply is P = 4 + Y⁄100. What is the equilibrium real output Y where the two lines cross, in billions of dollars?
2. On the aggregate demand line P = 20 − Y⁄100, what price level P goes with real output Y = 800?
3. With nothing else about buyers changed, how much real output Y, in billions of dollars, do buyers want on the same aggregate demand line P = 20 − Y⁄100 if the price level is 13?
4. Government purchases rise and aggregate demand becomes P = 22 − Y⁄100, while short-run aggregate supply stays P = 4 + Y⁄100. What is the new equilibrium real output Y, in billions of dollars?

Beside each answer, add one brief interpretation:

• Problem 1: say your result in words, and explain why the economy settles where the two lines cross, using the term short-run equilibrium.
• Problem 2: check the price level on short-run aggregate supply and write the crossing as a point (Y, P), then explain what the vertical axis measures, naming the price index it is like.
• Problem 3: say whether this is a movement along a curve or a shift of a curve, and explain why someone who says aggregate demand shifted left has misread it.
• Problem 4: find the new price level and check it on short-run aggregate supply; name the curve, the direction, and how the price level and real output changed together; then say which curve an oil-price shock would move, which way, and what would happen to the price level and real output. Then label each of these two statements positive or normative and give the reason: (a) "If government purchases rise, the model predicts a higher price level and higher real output." (b) "The government should raise its purchases to lift output."

Explain it to a non-expert

A friend who runs a small hardware store hears that the government will spend more on road repairs and asks you, "Will that push prices up, or will it help business?" Write a 3–5 sentence message that explains, in everyday words, which curve the road spending moves and what this week's model predicts for the price level and real output, and names one limit, including that the numbers are illustrative and that a real economy is often hit by more than one change at once. Explain any technical term in everyday words. More than one good answer is possible.

For a different, ungraded example, imagine a coworker who asks why stores across the country might get busier if prices everywhere fell. Model answer: "When prices across the whole economy fall, the money people already have saved buys more, so many of them feel able to spend a little more. Economists call that the wealth effect, one of the reasons total spending rises when the overall price level drops. It is a prediction from a model, not a promise, because other things, such as worries about jobs, can pull spending the other way."

Use that pattern for the road-spending question, with your own wording and evidence.

Show your arithmetic. A reader should be able to reproduce every number you report from the two lines without guessing which values or steps you used.

Deliverables

Submit a single report containing:

• the four answers, each with the arithmetic shown and the brief interpretation the task names for that problem;
• your message to the store owner, saying which curve moves, what the model predicts for the price level and real output, and one limit; and
• a one-line restatement of the two lines you used, so your results are reproducible.

Keep it to roughly one page. Clear and correct beats long.

Choose how you show it. Present your report as written text, or as a recorded audio or video explanation of about three minutes with a transcript, or as a labelled sketch of the two crossings with both curves named and a short note. Every form is graded by the same scoring criteria. Submit in any accessible file type or as a link; a recorded response may be submitted as audio or video with a transcript, or as text.

How you'll be graded

The full analytic rubric is attached to this assignment in Canvas.

Academic integrity and AI use

This version is designed to be completed without AI: do the computations, the interpretations, and the writing yourself, without a chatbot or other AI tool. You may use a calculator, a spreadsheet, or a graphing tool for the arithmetic and the sketch. Submitting AI-generated work as your own, or copying another student's work, is an integrity violation under the course policy.

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