2) Assume that the United States economy is currently in long-run equilibrium.a) Draw a correctly labeled graph of aggregate demand and aggregate supply and showeach of the following.i. The long-run aggregate supply curveii. The current equilibrium output and price levels, labeled as YE and PLE.b) Assume that the government increases spending on national defense without raisingtaxes.i. On your graph in part (a), show how the government action affects aggregatedemand.ii. How will this government action affect the unemployment rate in the shortrun? Explain.c) Assume that the economy adjusts to a new long-run equilibrium after the increase ingovernment spending.i. How will the short-run aggregate supply curve in the long-run equilibriumcompare with that in the initial long-run equilibrium in part (a)? Explain.ii. On your graph in part (a), label the new long-run equilibrium price level asPL2.

Economy is already at full employment level . Under this situation where natural rate of…

Answered: O Assume that the United States economy…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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2) Assume that the United States economy is currently in long-run equilibrium.
a) Draw a correctly labeled graph of aggregate demand and aggregate supply and show
each of the following.
i. The long-run aggregate supply curve
ii. The current equilibrium output and price levels, labeled as YE and PLE.
b) Assume that the government increases spending on national defense without raising
taxes.
i. On your graph in part (a), show how the government action affects aggregate
demand.
ii. How will this government action affect the unemployment rate in the short
run? Explain.
c) Assume that the economy adjusts to a new long-run equilibrium after the increase in
government spending.
i. How will the short-run aggregate supply curve in the long-run equilibrium
compare with that in the initial long-run equilibrium in part (a)? Explain.
ii. On your graph in part (a), label the new long-run equilibrium price level as
PL2.

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d. In order to finance the increase in government spending on national defense from part (b), the government borrows funds from the public. Using a correctly labeled graph of the loanable funds market, show the effect of the government’s borrowing on the real interest rate.

e. Given the change in the real interest rate in part (d), what is the impact on each of the following?

1. Investment
2. Economic growth rate. Explain.

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