Question

Each scenario should have a graph and a written response.

1. A stock market collapse that hurts consumer and business confidence; as a result, the economy falls into the flat aggregate supply zone.
2. Extremely rapid growth of exports. Currently, the economy is producing at full employment.
3. Rising inflation concern. Currently, the economy is producing at the intermediate zone of the aggregate supply curve.
4. A rise in oil prices and inputs costs. Make your own assumption of the original equilibrium.

Sketch AD-AS diagram for each situation above. Include a vertical potential GDP, the aggregate demand and aggregate supply curves, and have labels of the axis and the equilibrium.

Specify whether expansionary or contractionary fiscal policy would be most appropriate to each situation, sketch the change of AD or AS or both.

Give an example of the fiscal policy and explain why (apply keynesian or neoclassical theories) it might help combat the economic situation, for each scenario. In addition, with your graph, explain what happens to price level, employment/unemployment, real GDP, and output gap.

Answer 1