Question

Using SRAS-AD-LRAS framework and beginning at long run equilibrium, explain the impact of an expansionary fiscal...

Using SRAS-AD-LRAS framework and beginning at long run equilibrium, explain the impact of an expansionary fiscal policy in an economy. Discuss the impact on Price level, real GD, unemployment and interest rate both in short and long run.

Homework Answers

Answer #1

At the long run equilibrium, there is potential GDP achieved and natural level of  unemployment. At this stage, if expansionary fiscal policy takes place, then:

1. AD will shift to the right and Price level will increase at the short run, unemployment level will be lower than the natural rate of unemployment in the short run. there will be expansionary gap (real GDP will be more than potential GDP) in the short run.

2. Due to inflation set in the economy, SRAS curve will shift to the left and long run GDP will be achieved in the long run. At this level, price level will be higher in the long run. Unemployment will increase and become equal to the natural rate of unemployment in the long run.

Interest rate is majorly affected by the monetary policy, rather fiscal policy.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Draw the AD-SRAS-LRAS diagram for the U.S. economy starting in a long-run equilibrium before and after...
Draw the AD-SRAS-LRAS diagram for the U.S. economy starting in a long-run equilibrium before and after Covid-19. Use your diagram to illustrate and determine the SR and LR effects on U.S. GDP, the price level, and unemployment after Covid-19.
Suppose that in a closed economy the fiscal policy is contractionary and monetary policy is expansionary,...
Suppose that in a closed economy the fiscal policy is contractionary and monetary policy is expansionary, and the central bank is setting the interest rates (LM is horizontal). Graphically analyze this policy mix by using IS-LM diagram. What will be the impact on real income and on interest rate in the short run? What will be the impact of this policy mix on the economy in the medium run? Show by using an AD-AS-LRAS diagram.
Expansionary fiscal policy causes inflation and no long-run boost in output if __________. A. the economy...
Expansionary fiscal policy causes inflation and no long-run boost in output if __________. A. the economy is producing above SRAS B. the economy is producing below SRAS C. the economy is producing above LRAS D. the economy is producing below LRAS
Using the aggregate demand and aggregate supply (AD-SRAS) framework, explain how a large-scale natural disaster would...
Using the aggregate demand and aggregate supply (AD-SRAS) framework, explain how a large-scale natural disaster would be expected to impact the economy. (Take the economy through the steps from equilibrium to disequilibrium to equilibrium using the AD-SRAS framework.) Discuss how an economist who believes the economy is self-regulating would view the longer term impact of such a disaster, and whether they would advocate the need for government intervention.
Draw a basic short run aggregate supply (SRAS), aggregate demand (AD) and long-run aggregate supply curve...
Draw a basic short run aggregate supply (SRAS), aggregate demand (AD) and long-run aggregate supply curve (LRAS) that shows the economy in long-run equilibrium.
AD-SRAS-LRAS model of the economy. Assume the SRAS curve is upward sloping 1. Congress has debated...
AD-SRAS-LRAS model of the economy. Assume the SRAS curve is upward sloping 1. Congress has debated raising the minimum wage to over $10 per hour. Doing so would permanently increase the production costs to businesses, especially those relying on lower-skilled workers. Use the AD-AS model to discuss the macro impacts on the price level, real GDP and unemployment 2.The Federal Reserve has decided to design a policy response to the shift in part (a). What policy options are available and...
3. An economy is initially at a long run equilibrium (GE). A. On the AD-AS graph,...
3. An economy is initially at a long run equilibrium (GE). A. On the AD-AS graph, show the AD, LRAS and SRAS curves/lines. Label this “A” B. The Central Bank (Federal Reserve) increases the money supply. Give one action the Fed can take to increase the money supply.       _________________________________ Show how this changes the AD-AS graph. Label the curve/line that shifts with a “2” and label the new equilibrium “B”       There is no additional policy action: C. Show...
Assuming the economy is in long-run equilibrium, using an AS/AD diagram, demonstrate graphically and explain verbally...
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.
Use AD and AS curves to explain the effects on the equilibrium price level and the...
Use AD and AS curves to explain the effects on the equilibrium price level and the equilibrium level of output in the short run. (a) An expansionary fiscal policy with the economy operating near full capacity. (b) A contractionary monetary policy during a period of high unemployment and excess industrial capacity. (c) A strong hurricane destroys energy plants which cause energy prices to increase, assuming that the Fed attempts to keep interest rates constant by accommodating inflation. (d) The federal...
Use the AD-SRAS-LRAS model and diagram of chapter 10 to explain the economy’s likely transition to...
Use the AD-SRAS-LRAS model and diagram of chapter 10 to explain the economy’s likely transition to a major stock market decline that reduces the wealth of U.S. consumers. Show both long run and short run outcomes for the case where the AS is upward sloping and the case where AS is horizontal
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT