Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregatedemand 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 isperceived 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 LEVEL12010080402000LRASSRASAD246810QUANTITY OF OUTPUT (Trillions of dollars)12ADSRASLRAS?True or False: Supply-side economics is a long-run, growth-oriented strategy.

In order to foster economic growth and prosperity, supply-side economics places a strong emphasis on…

Answered: True or False: Supply-side economics is…

Business

Economics

True or False: Supply-side economics is a long-run, growth-oriented strategy.

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section: Chapter Questions

Problem 1TY

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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. 120 Potential GDP AS 100 PRICE LEVEL 60 80 60 40 40 20 20 0 0 2 4 6 8 AD 10 12 QUANTITY OF OUTPUT (Trillions of dollars) AD 1 AS Potential GDP True or…
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.
You will draw four separate Aggregate-Demand/Aggregate-Supply graphs. Each graph will have one curve shift. Be sure to label axis, curves, and equilibrium. Change colors to show the shift and label the new equilibrium. Draw an ADAS graph at equilibrium. Suppose the interest rates on loans on capital goods decrease. Which curve will shift? Draw the new equilibrium. Draw an ADAS graph at equilibrium. Suppose there is an decrease in government spending. Which curve will shift? Draw the new equilibrium. Draw an ADAS graph at equilibrium. Suppose the income of our trading partners increase. Which curve will shift? Draw the new equilibrium. Draw an ADAS graph at equilibrium. Suppose there is widespread concern that prices will continue to rise in the future. Which curve will shift? Draw the new equilibrium.
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 N and economy M, implement a tax cut of equal size. The tax cut in economy N is permanent, while the tax cut in economy M is temporary. The economies are otherwise completely identical. The tax cut will have a larger impact on aggregate demand in the economy with the (temporary tax cut/permanent tax cut) .
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 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.
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…
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 Potential GDP 136 132 128 124 A 120 116 112 108 400 500 600 AD 1 AD2 AS 124 700 800 900 1000 1100 1200 REAL GDP (Billions of dollars) ? The economy is currently experiencing a recessionary gap of $ billion. To close this gap, one option would be for the government to decrease not change). government purchases by $ billion (assuming net taxes do If the government kept its purchases constant, it could also close the gap by cutting ▼ net taxes (taxes minus transfers) by $ - MPC (Hint: In this case, since taxes do not vary with income, the formula for the…
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…
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 Potential GDP 136 132 128 124 A 120 116 112 108 400 500 600 AD 2 AD₁ 700 800 900 AS 124 1000 1100 1200 REAL GDP (Billions of dollars) The economy is currently experiencing a recessionary gap of $ billion. To close this gap, one option would be for the government to decrease not change). government purchases by $ billion (assuming net taxes do If the government kept its purchases constant, it could also close the gap by cutting (Hint: In this case, since taxes do not vary with income, the formula for the multiplier for a change in fixed taxes is net…
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?
In an effort to increase output in the short run due to the poor economy, government officials have decided to cut taxes. They are considering two possible temporary tax cuts of equal size in terms of lost revenue. The first would reduce the taxes on people with incomes above $100,000 per year. The second would cut taxes on people with incomes below $60,000 for one year. Which change would have a greater impact on aggregate spending (i.e shift the aggregate demand curve further to the right)? Why?