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A country is operating below full employment. Illustrate this economy on a fully-labeled aggregate demandaggregate supply model. Include aggregate demand, short-run aggregate supply, and long-run
A country is operating below full employment.
- Illustrate this economy on a fully-labeled aggregate demandaggregate supply model. Include aggregate demand, short-run aggregate supply, and long-run aggregate supply.
- Label the short-run equilibrium price PE and the short-run equilibrium output YE.
- Label the full-employment level of output YF.
- If the government and central bank do not intervene, how would this economy adjust in the long run? Explain.
- Illustrate the process of part (b) on your graph from part (a).
- The government decides to use fiscal policy to correct the economic situation in part (a). Assume the difference between the short-run and long-run equilibrium output is worth $80 billion, and the marginal propensity to consume is 0.9. Calculate one specific and effective fiscal policy action the government could take.
- What would be the short-run impact of the government's action on the aggregate price level?
- What would be the short-run impact of the government's action on the potential output of the economy?
- Will the long-run equilibrium price level if the government intervenes be less than, equal to, or greater than the long-run equilibrium price level without intervention?
- Show the impact of the government intervention from part (d) on the equilibrium real interest rate on a fully labeled loanable funds market graph.
- Will the long-run aggregate supply curve move as a result of the change from part (h)? Explain.
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