Question

1. In going from the short run equilibrium to the long-run equilibrium, briefly explain how the composition of real GDP may have changed.

2. Briefly explain what the difference in the growth rate of potential GDP might occur If instead of a decrease in the net tax rate, there was an increase in government purchases.

3. Briefly explain what the “Money Neutrality” argument implies about the effectiveness of discretionary fiscal policy and the impact on potential real GDP and price level in the long run.

4. Briefly explain what is meant by the “paradox of thrift”.

5. Briefly explain what the neoclassicals assume about technology in their model of economic growth and what. It meant for economic growth over time.

Answer 1

Answer 1

In macrso economics , we often understand two main types of equilibrium , One is short run and other corresponding to long run .In case of short run micreconomic analysis the other prices and wage do not react or respond with change in economic condition.In market , as economic condition change , the wage or price do not quickly adjust to maintain the short run equilibrium .Here price stickness and wage is a barrier for achieveing the natural employement level an the potential output whereas i case of long run equilibrium the prices and wags are flexible so the employement move to its natural level an the GP (real ) to its potential .This is because in long run we are allowed to see the macroeconomy the adjustment in full market has been achieved .

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