Question

Suppose that the government of an economy that is in its long-run equilibrium gives out money to most of the residents. Using the IS-LM and AS-AD model, describe both the short-run effects and the long-run effects of the following changes on national income, the interest rate, the price level, consumption, investment, and real money balances. Make sure to use both words and figures.

Answer 1

Ans:- IS-LM MODEL

suppose the govt gives money to most of the residents as Government increase their expenditure IS curve shifts rightward due to increase in Aggregate Demand . As income increases from Y1 to Y2 money demand also increases as a result rate of interest also increases from r1 to r2. which leads to decrease in investment therefore income falls from Y2 to Y3. due to crowding out effect income increases from Y1 to Y2.

AD - AS Model

IN long run due to increase in government spending AD shifts rightward upto AD3 and income increases upto Y3 beyond that only Price level rises from P3 ato P4 as output reaches to their full capacity SO LRAS curve become vertical to Y AXIS .

Interest I GX 1 - 11201 Rate of 1526, 10 lucome