Question

1) How will our AD/AS graph look like when U.S. Government increases spending for public schools?

2) How will our AD/AS graph look like when domestic producers are given government subsidies?

3) How will our AD/AS graph look like when U.S. Congress passes law to decrease the age of working Americans to 13?

4) How will our AD/AS graph look like when the cost of coal rises?

5) How will our AD/AS graph look like when the U.S. invades Canada?

How can we go back to full economy (point A)? Use the Classical and Keynesian methods.

Answer 1

1) Increase in government spending increases AD ( AD = Consumption + investment + government spending + net export) and shift the AD curve rightward. As a result, both price level and real GDP increases.

2) When domestic producers are given government subsidies, they will produce more. As a result AS increases and shifts to the right. This causes decrease in price level and increase in real GDP.