Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Dear Expert, the question that is provided as an image is one question.
If there the questions necessitate you to interact with the graph, kindly make your work clear and apparent as to how I should accordingly interact with it.
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Transcribed Image Text:4. Use of discretionary policy to stabilize the economy
The following graph shows a hypothetical aggregate demand curve (AD), short-run aggregate supply curve (SRAS), and long-run aggregate supply
curve (LRAS) for the U.S. economy in May 2020.
Suppose the government decides to intervene to bring the economy back to its potential output. In this case, the government would engage in
policy.
Restrictive or expansionary?
Depending on which curve is affected by the government policy, shift either the SRAS curve or the AD curve to reflect the change that would
successfully restore potential output.
150
SRAS
AD
130
110
SRAS
90
AD
70
LRAS
sales tax / lags / inflation?
50
20
22
24
26
28
30
OUTPUT (Trillions of dollars)
Suppose that in May the government undertakes the type of policy required to bring the economy back to potential output given in the previous
scenario. In September 2020, consumer confidence increases, leading to an increase in consumer spending. Because of the
with implementing fiscal policy, the impact of the government's nevi policy will likely
associated
once the
effects of the policy are fully realized.
fall short of potential output
push the economy beyond potential output
leave the U.S. economy unchanged
increase the long-run production capacity
PRICE LEVEL
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