Question

Both problems deal with Aggregate demand and Aggregate Supply

Question1)Explain whether the following government policies affect the aggregate demand curve or the short-run aggregate supply curve and how.

1. The government reduces the minimum nominal wage.

2.The government increases Temporary Assistance to Needy Families (TANF) payments, government transfers to families with dependent children.

3.To reduce the budget deficit, the government announces that households will pay much higher taxes beginning next year.

4.The government reduces military spending.

Question 2) In Wageland, all workers sign an annual wage contract each year on January 1. In late January, a new computer operating system is introduced that increases labor productivity dramatically. Explain how Wageland will move from one short-run macroeconomic equilibrium to another. Illustrate with a diagram.

Answer 1

1.When government reduces minimum wage,the AS falls because less workers would be willing to work at the existing wages.

2..AD would rise because transfers lead to increase in income of families.

3.Taxes would be higher for the next year.It means that prices would be higher.To avoid paying higher prices,people increase the consumption in the current period.AD rises.

4.AD would rise if the funds from defense would be diverted to developmental activities.