Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand (AD) curve and short-run aggregate supply (AS) curve for the economy. The long-run aggregate supply curve is represented by a vertical line at the potential GDP level of $6 trillion. The economy is initially producing at potential GDP. Suppose that fiscal authorities decide to decrease marginal tax rates. Assume that this change in marginal tax rates is perceived as a long-term change. Shift the appropriate curves to illustrate the supply-side view of the fiscal policy effect on output and the price level. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. 20 120 100 80 PRICE LEVEL 88 40 20 2 Potential GDP AS AD 6 8 AD 10 12 QUANTITY OF OUTPUT (Trillions of dollars) 口 AS S Potential GDP True or False: Supply-side economics is a long-run, growth-oriented strategy. True False ?

Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand (AD) curve and short-run aggregate supply (AS) curve for the economy. The long-run aggregate supply curve is represented by a vertical line at the potential GDP level of $6 trillion. The economy is initially producing at potential GDP. Suppose that fiscal authorities decide to decrease marginal tax rates. Assume that this change in marginal tax rates is perceived as a long-term change. Shift the appropriate curves to illustrate the supply-side view of the fiscal policy effect on output and the price level. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. 20 120 100 80 PRICE LEVEL 88 40 20 2 Potential GDP AS AD 6 8 AD 10 12 QUANTITY OF OUTPUT (Trillions of dollars) 口 AS S Potential GDP True or False: Supply-side economics is a long-run, growth-oriented strategy. True False ?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Q.1.4 Which of the following statements about Fiscal Policy is INCORRECT? (a) In order to combat inflation, the South African Reserve Bank must apply a contractionary fiscal policy; (b) A contractionary fiscal policy can result in higher levels of unemployment; (c) Expansionary fiscal policy will increase the budget deficit; (d) The application of fiscal policy will have no effect on aggregate supply in the AD-AS model.
Suppose that the federal government decides to reduce the budget deficit and cuts government purchases by $200 billion and raise personal income taxes by $200 billion. Suppose the MPC = .5. How much and in which direction would the AD curve shift because of the government spending cut? Show your work. How much and in which direction would the AD curve shift because of the tax increase? Show your work. (Note: we know these numbers in parts A & B are not accurate quantitative assessments of the policy actions - but the exercise allows us to think about the mechanisms through which these policy actions will affect the economy.) Using the above numbers, draw the AS-AD diagram and illustrate the short-run impact of the combined policy action assuming the economy begins at potential output. Label the original equilibrium with point "A" and the new short-run equilibrium with point "B". Be sure to label the magnitude of the curve shift. Describe the impact of the policy action on…
An economy is operating with output that is $40 billion below its natural level, and fiscal policymakers want to close this recessionary gap. The central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding out. The marginal propensity to consume is 4/5, and the price level is completely fixed in the short run. In what direction and by how much would government spending need to change to close the recessionary gap? Explain your thinking Please give me answer in daetail please
The aggregate expenditures model explains how: the inflation rate in an economy varies with the money supply a country spends its money relative to what it earns the Federal Reserve prints money during a recession Federal spending is shaped by the level of consumption in a country
Consider a closed economy with no government, where aggregate demand is determined by autonomous consumption, investment (which is independent of output), and the marginal propensity to consume. a) Given that autonomous consumption is 20, investment is also 20, and the marginal propensity to consume is 0.6, write out an equation for aggregate demand (AD) in this economy. b) Given this aggregate demand equation, and the equilibrium equation Y = AD, use algebra to find the equilibrium level of Y. (2 marks) c) Draw a diagram with output (Y) on the x-axis and aggregate demand (AD) on the yaxis. Draw two lines on this diagram: (i) Y = AD, and (ii) the aggregate demand function from part (a). Label the intercept of the AD line, and the point where the two lines intersect, with numerical values. d) Suppose that the marginal propensity to consume falls from 0.6 to 0.5. What would the new equilibrium level of Y be? Illustrate your answer in the diagram you drew for part (c). e)…
Consider a hypothetical closed economy in which the marginal propensity to consume (MPC) is 0.5 and taxes do not vary with income (that is, taxes are fixed rather than variable and the income tax rate t = 0). The following graph shows the aggregate demand curves (AD₁ and AD₂), the short-run aggregate supply (AS) curve, and the long-run aggregate supply curve at the potential GDP level. The economy is currently at point A. PRICE LEVEL 140 136 132 128 124 120 116 112 108 100 200 Potential GDP The economy is currently experiencing AD 1 AD2 AS 124 300 400 500 600 REAL GDP (Billions of dollars) 700 800 To close this gap, one option would be for the government to not change). 900 gap of $ billion. government purchases by $ billion (assuming net taxes do If the government kept its purchases constant, it could also close the gap by net taxes (taxes minus transfers) by $ MPC (Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes is…
Examine the following policies and determine which would decrease the level of aggregate demand. Decreasing in government spending and decreasing taxes Increasing investment and increasing government spending Increasing consumption and decreasing taxes Decreasing in government spending and increasing in taxes
In February 2021, retail sales fell by 3.3% compared to January. What does the drop in retail sales indicate about how consumption has changed? Investment spending fell by 2.2% in February. How will these changes affect aggregate expenditures? How will equilibrium GDP be affected? How do you think the stimulus checks that many Americans will receive will affect consumption? How will that affect aggregate expenditures and GDP and employment? Do you expect the change in aggregate expenditures be temporary or permanent? Part of the stimulus package passed by Biden includes an extra $300 per week in unemployment benefits. Do you agree with the stimulus checks and additional $300 per week in unemployment benefits? Why or why not?
Please note that I have answers to parts 1 and 2. All I need you to do it help me with part 3. Thank you so much for your time and effort! Figure 1: Hayek’s (Classical) AD-AS Model (Image normally goes here) Part 1: Why does Hayek’s aggregate supply curve always lead to an equilibrium level of national output equal to the full-employment level of real GDP? Part 2: Hayek says that markets will heal themselves and that government should not intervene. How does the AD-AS model reflect Hayek’s idea that governments cannot increase real GDP beyond the level that the free market economy is able to produce? Part 3: Do you believe that the Hayek’s classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not?
14. Crowding out On the following graph, AD₁ represents the initial aggregate demand curve in a hypothetical economy, and AS represents the initial aggregate supply curve. The economy's full-employment output is $12 trillion. On the following graph, use the grey point (star symbol) to mark the equilibrium. (Note: You will not be graded on any adjustments made to the graph.) PRICE LEVEL (CPI) 106 105 104 103 102 101 100 99 98 97 96 6 7 8 1 1 1 11 AS AD₁ Full Employment 9 10 11 REAL GDP (Trillions of dollars) 12 13 14 15 AD₂ AD 3 16 Equilibrium ?
Suppose an economy is initially in equilibrium at its potential output level. As a result of an unexpected crisis in the financial markets, the AD curve suddenly shift to the left by a horizontal distance equal to $140 billion. Suppose the government wants to combat the resulting recession by increasing its spending. Assuming the marginal propensity to consume in this economy is 0.25, by how much must the government increase its spending to restore the economy to its initial level of output? (You can ignore the fact that the government must somehow finance the resulting budget deficit.) (Calculate your answer in billions of CAD, round it to one decimal places, and write it without units. E.g., write 1.0 for $1 billion.)