Question

Suppose the following graph is the current condition of the U.S. economy. Answer the following questions...

Suppose the following graph is the current condition of the U.S. economy.

Answer the following questions based on this graph.

  1. (10 points) Based on the graph, what type of gap is the U.S. economy experiencing?
  2. (40 points) From the Keynesian View—
    a. Is the issue on the demand or supply side of the economy?
    b. What government actions would be recommended?
    c. According to the Phillips curve, what would happen to the price level if we pursue policies to lower unemployment?
    d. What did Keynes mean by “sticky prices”?
  3. (30 points) From the Neoclassical View—
    a. What change needs to happen in our graph to bring the U.S. economy back to potential output?
    b. How will this happen?
    c. Would this lead to more or less inflation that the Keynesian actions?
  4. (10 points) From 2007-2009 the US experienced one of its worst economic collapses. Which approach did the U.S. government follow in regards to the economy—Keynesian or Neoclassical?
  5. (10 points) In Spring 2020, the U.S. economy once again found itself in an economic crisis, this time due to the COVID-19 pandemic. Which approach did the U.S. government follow in regards to the economy—Keynesian or Neoclassical?
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Homework Answers

Answer #1

US economy is experiencing recessionary gap.

A) from Keynesian view, it is demand sided issue.

B) Expansionary Fiscal Policy like Increase in government spending, reduction in taxes or transfer payments to household,can be done ,to increase aggregate demand.

C)It will lead to increase in output and Decrease in unemployment.

Decrease in unemployment will increase inflation or prices.

D) Sticky prices refers to tendancy of constant price of very slow adjustment of price.

A) According to neoclassical, short run aggregate supply will increase and shift right and economy will reach long run equilibrium.

B)This will happen as higher unemployment bring down the wage ,which Decrease cost of Production and thus Increase aggregate supply.

C)It will lead to less inflation than Keynesian actions.

D) Goverment used Keynesian actions as they lauched so many programs to increase aggregate demand and make financial system stable again.

Goverment again used Keynesian approac ,by lauching program for transferring money to household and etc ,to increase aggregate demand

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