QUESTION 4 Read pages 484-493 of the textbook before attempting this question LR

Question

QUESTION 4 Read pages 484-493 of the textbook before attempting this question LRAS SRAS 130 120 110 100 90 AD 0 15 16 1718 19 20 Real GDP (trillions of 2009 dollars) Assume that the economy is currently at Eo. [in a recession / in an expansion / at Based on the figure, the economy is currently full employment]. Without government intervention, the short run aggregate supply will move to the [leftright] and the price level in the long run equilibrium will be130 / 120 / 110 / 100 90] If the government decides to help the economy to return to potential GDP, which type of policy should the government implement? Expansionary fiscal policy / contractionary fiscal policy] [reducing taxes / reducing interest rates /reducing This policy involves government spending] After government intervention, the economy will reach a new long run equilibrium. The price level will equal and output will equal S trillion.

Explanation / Answer

Based on the figure, the economy is currently in an expansion (equillibrium RGDP > potential GDP)

Without government intervention, the short run aggregate supply will move to the left and the price level in the long run equillibrium will be 120

If the government decides to help the economy to return to potential GDP, the government will implement a contractionary fiscal policy. (AD curve moves to the left)

This policy involves reducing government spending.

After government intervention, the economy will reach a new long run equillibrium. The price level will equal 100 and output will equal $16 tn

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---