Question

please answer all questions

11. Demonstrate graphically and explain verbally the impact of a decrease of 50 in government spending on the AD curve in the diagram when the multiplier is 3.

12. Using an AS/AD diagram, demonstrate graphically and explain verbally the short-run impact on the price level and real output of an increase in the labor productivity schedule.

13. Assuming the economy is in long-run equilibrium, using an AS/AD diagram, demonstrate graphically and explain verbally the long-run impact on the price level and real output of an expectation by business executives of a recession in the near future.

14. Demonstrate graphically and explain verbally a recessionary gap. Describe two solutions for closing the gap.

15. Demonstrate graphically and explain verbally the case of an inflationary gap. Describe the forces in the economy that will result in the gap closing itself.

Answer 1

(11)

Spending multiplier = Change in aggregate demand / Change in government spending

3 = Change in aggregate demand / (-50)

Change in aggregate demand = 3 x (-50) = -150

Therefore, aggregate demand will decrease by 150. This will shift the AD curve leftward by 150 units, decreasing price level and decreasing real GDP.

In following graph, AD0 and SRAS0 are initial aggregate demand and short-run aggregate supply curves intersecting at point A with initial price level P0 and initial real GDP Y0. When AD falls by 150, AD0 shifts left to AD1, intersecting SRAS0 at point B with lower price level P1 and lower real GDP Y1, where (Y0 - Y1) equals 150.

NOTE: As per Answering Policy, 1st question is answered.