Question

1a)Name three examples of discretionary fiscal policy that could be used to combat the recession. Draw a graph to illustrate the effects of these policies in the AD‐AS model. If AD shifts, explain what component is affected and why. If SRAS shifts, explain why.

1b)How will these policy actions affect output, prices, and unemployment?

Answer 1

1. increase in govt spending

2.decrease in taxes

3.increase in investment

Now to combat ression , AD has to increase , shifting Ad curve to right. consumption and investment will increase due to more job creation . job creation will increase the demand for money(due to higher transactions) and thus boost AD.

in short run , prices and wages are assumed to be sticky , but if it shifts , it is due to fact ie increased employment will lead to more production.

unemployment will fall , output will rise and over time prices will rise too.