### Understanding the Economic Graph**Graph Explanation:**The graph represents an economic model showing the relationship between price level and output, measured in trillions of dollars. It includes three curves:1. **AD (Aggregate Demand):** This downward-sloping curve shows the total demand for goods and services at varying price levels.2. **SRAS (Short-Run Aggregate Supply):** This upward-sloping curve represents the total supply of goods and services that firms are willing to sell at varying price levels in the short run.3. **LRAS (Long-Run Aggregate Supply):** Represented by a vertical line, indicating the economy's potential output, unaffected by price level changes.**Contextual Analysis:**- **Right Axis:** Price Level (ranging from 50 to 150).- **Bottom Axis:** Output in trillions of dollars (ranging from 20 to 30).The initial intersection of the AD and SRAS curves does not align with the LRAS curve, indicating that the economy is not at its full potential output.### Scenario AnalysisThe task is to adjust either the SRAS or AD curve in response to a government policy designed to restore potential output.- **Policy Context:** In February, the government implements a policy to bring the economy back to potential output. - **Impact of Trade Policy:** In April 2020, the U.S. increases imports following the lifting of trade restrictions on Japanese goods.### Implications of Policy- **Fiscal Policy Association:** Consider the factors (such as government spending or taxation) impacting the implementation and effects of fiscal policy.- **Expected Policy Outcome:** The new government policy will likely cause the affected curve to shift, realigning the economy with its potential output once the policy's effects are fully realized.Fill in the blanks with appropriate economic concepts related to the implications and expected effects of such policy decisions. # 4. Use of Discretionary Policy to Stabilize the EconomyThe 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 February 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.**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.**## Graph Explanation- **Axes:** - The vertical axis represents the price level. - The horizontal axis represents the output in trillions of dollars.- **Curves:** - **AD (Aggregate Demand Curve):** Downward-sloping curve depicted in blue, indicating the relationship between the total output demanded and the price level. - **SRAS (Short-Run Aggregate Supply Curve):** Upward-sloping curve shown in orange, showing the relationship between the price level and the total output supplied in the short run. - **LRAS (Long-Run Aggregate Supply Curve):** Vertical line shown in purple, representing the potential output of the economy where it is most efficient at any price level.The intersection of the SRAS and AD curves signifies the current equilibrium output and price level, while the LRAS indicates the economy’s potential output. Adjustments to the SRAS or AD curves as a result of government policy can restore the economy to its potential output level.

(4). The government would engage in contractionary fiscal policy. Aggregate demand changes with…

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 February 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. 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.

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 February 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. 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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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