Question

Suppose real output is initially at its full employment level. Using Aggregate Demand (AD)—Aggregate Supply (AS) framework, discuss the short-run and long-run effects of a decrease in government expenditure on the price level, real output, nominal wage rate and real wage rate under the following three alternative assumptions: i) nominal wages are fully flexible, ii) nominal wages are relatively slow to adjust, and iii) nominal wages are completely rigid.

Thanks.

Answer 1

1 marker and genuine yield fall since AD fall. Ostensible compensation falls in view of state and genuine pay remains a proportional since expenses have conjointly lessen As pay falls offer movements rightwards reestablishing introductory yield anyway the esteem keeps on being lower

2 worth and genuine yield level can fall. Ostensible pay can fall gradually so genuine pay ascends on the move as expenses have constrict. when it moderate yield can return back to a customary dimension anyway the esteem can at present be lower

3 yield and expenses can fall. Ostensible wages can remain affixed so genuine wages rise.