This problem is adapted and modified from Openstax Ch.17 problem 53.

Review ch.11 to 13 about AS-AD, Keynesian, and Neoclassical approaches.

(1)Each scenario is 4 points

Each scenario should have a graph and the written response.

Don't separate the graphical illustration and the written response; they should go together for each scenario.

1. A stock market collapse that hurts consumer and business confidence; as a result, the economy falls into the flat aggregate supply zone.
2. Extremely rapid growth of exports. Currently, the economy is producing at full employment.
3. Rising inflation concern. Currently, the economy is producing at the intermediate zone of the aggregate supply curve.
4. A rise in oil prices and inputs costs. Make your own assumption of the original equilibrium.

Use the following guidelines to draw an AD-AS and write your response for each scenario based on Keynesian and Neoclassical theories.

Sketch an AD-AS diagram for each of the economic situations described above. Your graph should include a vertical potential GDP, the aggregate demand and aggregate supply curves, and have labels of the axis and the equilibrium.

The AD-AS graph should be your own sketching (hand-drawn would be fine). If a graphical image is copied and is not your own sketching, you have to cite the source by putting an in-text link to the web source of the image.

Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to the economic situation. Sketch the change of AD or AS, or both, after the appropriate policy response.

Give an example of the fiscal policy and explain why (apply Keynesian or neoclassical theories) it might help to combat the economic situation. With your graph, tell what happens to the price level, employment /unemployment, real GDP, and output gap.

(2)What are some limitations of discretionary fiscal policy in combating a recession? What about automatic fiscal policy? (4 points)