1. The economy is in the short-run equilibrium, at the point given

below: Price level = 130, 

SR QD = 4 trillion

SR QS = 4 trillion 

(LRAS = 4.3 trillion) 

Consider Classical economy for this question. Using appropriate graphs, explain the impact of the economy in the long-run equilibrium.

  

2. a. Now consider Keynesian economy. Using details from Q (1), should the govt increase/decrease expenditure? By how much, given MPS = 0.4. (50-100 words)

 b. Now consider, the presence of crowding out effect along with the effects from part (a). Using the information in part (a), what is your new answer. (50-100 words)