1. Canada is an open economy that is currently in a recessionary output gap. (a) Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves, and show each of the following. (i) The current equilibrium real output and price level, labeled as Y, and PL₁, respectively (ii) Full-employment output, labeled Y₁ (b) The central bank and the government do not take any policy actions to close the output gap. (i) Explain how the economy will adjust to full employment in the long run. (ii) On your graph in part (a), show how the economy adjusts to full employment in the long run. (c) Suppose the Canadian government is unwilling to wait for the long-run adjustment process. The margina propensity to consume is 0.8. The equilibrium real output is $500 billion and the full-employment outpu $540 billion. (i) Calculate the minimum change and indicate the direction of change in government spending requi to shift the aggregate demand curve by the amount of the output gap. (ii) Calculate the minimum change and indicate the direction of change in taxes required to shift the aggregate demand curve by the amount of the output gap.

1. Canada is an open economy that is currently in a recessionary output gap. (a) Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves, and show each of the following. (i) The current equilibrium real output and price level, labeled as Y, and PL₁, respectively (ii) Full-employment output, labeled Y₁ (b) The central bank and the government do not take any policy actions to close the output gap. (i) Explain how the economy will adjust to full employment in the long run. (ii) On your graph in part (a), show how the economy adjusts to full employment in the long run. (c) Suppose the Canadian government is unwilling to wait for the long-run adjustment process. The margina propensity to consume is 0.8. The equilibrium real output is $500 billion and the full-employment outpu $540 billion. (i) Calculate the minimum change and indicate the direction of change in government spending requi to shift the aggregate demand curve by the amount of the output gap. (ii) Calculate the minimum change and indicate the direction of change in taxes required to shift the aggregate demand curve by the amount of the output gap.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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