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 ?

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter15: Fiscal Policy

Section: Chapter Questions

Problem 6SQ

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Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand curve (AD) and short-run aggregate supply curve (SRAS) for the economy. The long-run aggregate supply curve (LRAS) is represented by a vertical line at $6 trillion. The economy is initially producing at potential output. Suppose that fiscal authorities decide to increase 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. PRICE LEVEL 120 100 80 40 20 0 0 LRAS SRAS AD 2 4 6 8 10 QUANTITY OF OUTPUT (Trillions of dollars) 12 AD SRAS LRAS ? True or False: Supply-side economics is a long-run, growth-oriented strategy.
The graphs illustrate an initial equilibrium for the economy. Suppose that the government increases spending. Use the graphs to show the new positions of aggregate demand (AD), short‑run aggregate supply (SRAS), and long‑run aggregate supply (LRAS) in both the short run and the long run, as well as the short‑run and long‑run equilibriums resulting from this change. Then, indicate what happens to the price level and real GDP (or aggregate output) in the short run and in the long run. Adjust the graph. explain the second image as well and which is right.
Assume the Potential GDP is $15 trillion dollars. Use the table below to answer the following questions. Assume all values represent trillions of dollars. Use the table to create two graphs: 1. aggregate expenditure model and 2. an aggregate supply aggregate demand model. Note that the equilibrium in the table above will determine your real GDP and your potential GDP should be plotted in both graphs. What type of macroeconomic equilibrium does this economy reflect? Note that the multiplier is 2 because this economy has imports. If Investment expenditures increase by $2.5, how much does GDP increase? Does the increase in investment expenditures from part C result in a full employment equilibrium? Why? Graphically show the effects from part C in our Aggregate Expenditure Model and Aggregate Supply-Aggregate Demand Model.
In the following figure, the economy is initially in equilibrium at full-employment at point “e”. Assume that consumption falls by 100 leading to a shift in AD from AD1 to AD2. What is the new short-run macroeconomic equilibrium price and output? How large is the spending multiplier if there were no changes in the aggregate price level? How large is the spending multiplier if the aggregate price level adjusts to the new equilibrium?
Consider the graph at right showing an economy in recession. Aggregate demand is currently at AD. Equilibrium currently occurs at Eo. If aggregate demand was ADF, there would be full employment. Suppose the government engages in fiscal policy that results in full crowding out. Using the line drawing tool, draw the new demand curve that shows full crowding out. Carefully follow the instructions above, and only draw the required object. Price level Eo EF ADO F Real GDP per Year ($ trillions) SRASO ADF O U
The following graph plots an aggregate demand curve. Using the graph, shift the aggregate demand curve to depict the impact that a tax hike has on the economy. Suppose the governments of two very similar economies, economy Y and economy Z, implement a tax cut of equal size. The tax cut in economy Y is temporary, while the tax cut in economy Z is permanent. The economies are otherwise completely identical. The tax cut will have a smaller impact on aggregate demand in the economy with the (temporary tax cut/permanent tax cut) .
Complete the following table by matching the macroeconomic assumptions about aggregate supply to the appropriate school of thought. Assumption Classical Keynesian Only an increase in aggregate demand can move an economy out of a recession and back to potential real GDP quickly. Product prices and wages tend to be inflexible. The following graph shows the aggregate demand (ADAD) and aggregate supply (ASAS) curves for a hypothetical economy that is currently operating below its full-employment output level. That is, the economy is currently in a recession. The aggregate supply curve (ASAS) in this diagram is consistent with the view of aggregate supply. According to this viewpoint, the government should spending in response to the recession. Shift the appropriate curve on the graph to illustrate the impact of this change in government spending. ADASPRICE LEVELREAL GDP (Trillions of dollars)AD AS The prescribed…
5. Macroeconomic equilibrium and the multiplier effect The following graph shows a hypothetical economy in short-run equilibrium at an output level of $400 billion and a price level of 100. Suppose that potential GDP in this economy is $500 billion. Use the grey line (star symbol) to plot the long-run aggregate supply (LRAS) curve on the graph. PRICE LEVEL 200 175 150 125 100 75 50 25 0 0 100 200 300 400 500 REAL GDP (Billions of dollars) AS AD 600 700 800 AD AS Potential GDP ?
In order to break stagflation, the government has to increase expenditure on food subsidies in the form of food vouchers, unemployment benefits or allowances, wages subsidy to increase household consumption expenditure and boost up the AD. With increased consumption expenditure, aggregate demand will rise, which would send a signal to the aggregate supply (AS) to raise production. This will create a positive effect, which will bring the economy out of recession. Show this in a graph.
You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) exports = $20 billion, imports = $40 billion. If the full-employment level of GDP for this economy is $700 billion. Marginal Propensity to Consume (MPC) of the economy is 0.5. How much government purchases would be closing the GDP-gap here? Explain your answer, and show your calculation.
Consider a hypothetical closed economy in which there are no income taxes. If households spend $0.75 of each additional dollar they earn and save the remainder, the expenditure multiplier for this economy is The following graph shows the initial aggregate demand (AD) and short-run aggregate supply (SRAS) curves of this economy. Suppose that the economy is currently in a recession. Business firms are pessimistic about the future and do not respond to a fall in interest rates. In addition, all households are pessimistic about job prospects and desire to consume less and save more at all levels of income. As a result, personal consumption in this economy decreases by $1 billion. The reduction in personal consumption will lead to a decrease in aggregate demand by S Shift either the AD curve or the SRAS curve, or both, to show the new aggregate demand curve after the full impact of the multiplier process of the reduction in personal consumption has taken place. PRICE LEVEL (Billions of…
To support the economy against a recession triggered by the Coronavirus, the government is considering increasing public spending. Suppose the government decides to finance the additional spending with new taxes, and to increase taxes by the same amount as public spending. A critic to the government objects saying that if public spending and taxes increase by the same amount, no increase in GDP should be expected: what the government gives to the economy is taken back via taxes. Use the model of aggregate demand and aggregate supply to study if the proposed economic policy could increase GDP by computing the fiscal multipliers. a) Start from the model C + 1 + G + NX = Y with C the aggregate level of consumption, I the aggregate level of investment, G the level of fiscal spending, NX the net experts and Y the level of GDP. Assume NX = 0 and assume that C = c0 + c1(Y-T), with T the level of taxes. Interpret the economic intuition behind the function for consumption. What is c1? b) Derive…