In an AD/AS model, the point where the economy has excess capacity is called the: (A) Keynesian zone of the AS curve (B) intermediate zone of the AS curve (C) neoclassical zone of the AS curve (D) crossing point of the potential GDP line

Assume that an economy is initially operating at the natural rate of output (full employmentoutput). Use the AD-AS model to illustrate graphically the effects on price and output of areduction in government spending. Explain your assumptions with respect to the range ofaggregate supply of your analysis.

18. Use the AD/AS model to illustrate the following. Draw 6 graphs by hand. Show how the AD or the AS curve shift and in what direction (left or right). Also state what happens to equilibrium real GDP (Y), employment, and the equilibrium price level. [Note: Use the SRAS curve, not the LRAS.] a. an increase in government spending and/or transfer payments b. restrictive fiscal policy c. expansive monetary policy d. increase in investment according to Keynesians e. increase in investment according to supply-side economists f. a stock market crash

The accompanying graph represents the Keynesian cross for a country, where the planned aggregate spending line (Planned AE) is graphed against a 45° line. Suppose that there is an autonomous decrease in aggregate spending of $40 billion in this country. a. Show this change on the graph (you can drag and shift the whole line or either of the endpoints) and answer the following two questions. b. What is the initial unplanned inventory investment? If the number is negative, be sure to include a negative sign. billion dollars c. After firms adjust their production, what is the total change in real GDP? If the number is negative, be sure to include a negative sign. following two questions. vay and answer the b. What is the initial unplanned inventory investment? If the number is negative, be sure to include a negative sign. billion dollars c. After firms adjust their production, what is the total change in real GDP? If the number is negative, be sure to include a negative sign. billion…

Which of the following could shift the DAD (dynamic AD) curve to the right, all else equal? an increase in imports a higher real interest rate the Fed raising its target inflation rate a decrease in home purchases

Notice the major differences between our Keynesian Cross (in your chapter 9 appendix) and the Macro Equilibrium (AS and AD) diagram? Which model has more to offer in which situations?

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?

Q2

In the 1960s the U.S entered the Vietnam War,  and military expenditures (part of government expenditures) grew from an annual rate of $113 billion  to 138 billion. The economy was near full-employment and, therefore, given there was no offsetting tax increase, inflation pressures emerged. Assume the MPC is .75   A)  How did the increase in military expenditures affect AD?  B)  If in 1968 the AD Excess was $150 billion, what change in government expenditures would you have recommended?

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