Question

Suppose the economy is initially in long-run equilibrium and the
government reduces the marginal tax rate.

a. What will happen to output and inflation if the effects of the
tax cuts are stronger on aggregate demand than on potential
GDP?

show the changes in AD and Y*.

Both the AD and Y* (potential output) curves will shift to the left, so output and inflation will decrease. | |

The AD curve will shift to the left more than the Y* (potential output) curve, so output will increase and inflation will decrease. | |

The AD curve will shift to the right less than the Y* (potential output) curve, so output will decrease and inflation will increase. | |

The AD curve will shift to the right more than the Y* (potential output) curve, so output and inflation will increase. |

b. How will output and inflation be affected if the effects of the
tax cuts are stronger on potential GDP than on aggregate
demand?

show the changes in AD and Y*.

The Y* (potential output) curve will shift to the right more than the AD curve, so output will increase and inflation will be lower. | |

The Y* (potential output) curve will shift to the right and the AD curve will shift to the left, so output will be the same and inflation will be lower. | |

The Y* (potential output) curve will shift to the right less than the AD curve, so output will increase and inflation will be higher. | |

Both the Y* (potential output) and AD curves will shift to the left, so output will fall and inflation will be higher. |

Answer #1

Ans

1 D is right. Lower tax means greater disposable income and thus greater demand Lower taxes also increase winngness to work more shifting LRAS and thus potential output rightwards. BUT AD shifts more than LRAS as effect on demand is more than output. See fig 1. Clearly output rises and so does inflation but shift in AD is more than in Y2-Y1 (shift of potential output)

2 A is right. Reasoning is same as in A. Clearly shift in potential output (Y2-Y1) is greater than in AD. Also output rises from Y1 to Y2 but prices fall from p1 to p2. See fig 2

A decrease in tax rates
has no effect on the AD curve.
causes the AD curve to shift left.
causes the AD curve to shift right.
has only a short-term effect on real GDP.
usually leads to a reduction in potential GDP.
2.
To reduce the size of economic fluctuations, the government
could
make fewer permanent changes in government spending.
change government purchases often to encourage a shift of the
aggregate demand curve.
increase spending during a recession and decrease...

5- If an economy is in short-run equilibrium where the level of
real GDP is less than potential output, then, in the long run, one
will find:
A-Nominal wages will rise and the SRAS curve will shift left
bringing the economy back to its potential real GDP.
B-Nominal wages will rise shifting the AD curve to the right and
restoring real GDP to its potential level
C-Nominal wages will fall and the SRAS curve will shift right
bringing the economy...

a) Draw the U.S. economy in long run equilibrium--just draw it
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b) Suppose that firms expect profits to decrease. Which curve
will shift as a result of the shock and in which direction?
A.
SAS will shift Left
B.
AD will shift Right
C.
AD will shift Left
D.
SAS will shift Right
c) Illustrate the shift on your graph--again, just draw it on
your paper.
d) Explain what happens to Y, P, and the unemployment rate...

32. The economy is
experiencing substantial short-run unemployment. The
long-run aggregate supply curve is ___________. In the
long run, there will be _________ in the aggregate price
level.
A. horizontal, an increase
B. horizontal, a decrease
C. vertical, an increase
D. vertical, a decrease
33. The less
sensitive households are to changes in interest rates,
______________, for a given increase in the aggregate price
level.
A. the more the aggregate demand curve will shift
to the left
B. the less the aggregate demand curve will
shift to the left
C. the...

The interest rate effect on aggregate demand indicates that
a(n):
A. Decrease in the price level will
increase the demand for money, increase interest rates, and
decrease consumption and investment spending
B. Decrease in the price level will
decrease the demand for money, decrease interest rates, and
increase consumption and investment spending
C. Increase in the price level will
increase the demand for money, reduce interest rates, and decrease
consumption and investment spending
D. Increase in the supply of money...

Suppose that an economy is initially at the long-run and
short-run equilibrium.
In the next year, we observe that the real GDP and the potential
GDP remains the same but the price
level has increased.
Which curve(s) in the LRAS-SRAS-AD diagram must have shifted to
generate the observation
above? If any of the curves has shifted, state the direction of the
shift, propose a factor that leads to
the shift of the curve and state clearly whether the factor has...

When the economy is producing at an output level below the
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the unemployment rate is above the natural rate of
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the short-run aggregate supply curve will slowly shift to the
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the intersection of the short-run aggregate supply curve and the
aggregate demand curve is to the right of the long-run aggregate
supply curve.
the economy might be at the long-run equilibrium.
Which of the following is not a determinant of the...

If the economy began at potential output when a negative
aggregate demand shock hit, what would be the traditional monetary
policy action to stabilize output?
lower interest rates to increase spending and shift the AD curve
to the right
lower interest rates to increase spending and shift the AD curve
to the left
increase interest rates to increase spending and shift the AD
curve to the right
lower interest rates to decrease spending and shift the AD curve
to the...

In an aggregate demand-aggregate supply diagram, equal decreases
in government spending and taxes will
Group of answer choices
not affect the AD curve.
increase the equilibrium GDP.
shift the AD curve to the left.
shift the AD curve to the right.

1. How exactly can the RBA conduct an expansionary policy, and
how can it be represented in AD-AS model? a. the RBA buys
government bonds and Treasury bills, and AD curve shifts right. b.
the RBA sells government bonds and Treasure bills, and AS curve
shift right. c. the RBA increase the required-reserve ratio, and AD
curve shift left. d. the RBA decrease income taxes, and AD curve
shift right.
2. If the RBA is very sensitive to changes in...

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