5. Supply-side effects Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand (AD) curve and short-run aggregate supply (AS) curve for the economy. The long-run aggregate supply curve is represented by a vertical line at the potential GDP level of $6 trillion. The economy is initially producing at potential GDP. Suppose that fiscal authorities decide to decrease marginal tax rates. Assume that this change in marginal tax rates is perceived as a long-term change. Shift the appropriate curves to illustrate the supply-side view of the fiscal policy effect on output and the price level. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. PRICE LEVEL 120 100 M 40 2 Potential GDP AS AD 2 QUANTITY OF OUTPUT (Trillions of dollars) AD True or False Supply side economics is a short-rue, countercyclical strategy. Ofrue O False AS Potential GDP

5. Supply-side effects Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand (AD) curve and short-run aggregate supply (AS) curve for the economy. The long-run aggregate supply curve is represented by a vertical line at the potential GDP level of $6 trillion. The economy is initially producing at potential GDP. Suppose that fiscal authorities decide to decrease marginal tax rates. Assume that this change in marginal tax rates is perceived as a long-term change. Shift the appropriate curves to illustrate the supply-side view of the fiscal policy effect on output and the price level. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. PRICE LEVEL 120 100 M 40 2 Potential GDP AS AD 2 QUANTITY OF OUTPUT (Trillions of dollars) AD True or False Supply side economics is a short-rue, countercyclical strategy. Ofrue O False AS Potential GDP

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 1.8P

See similar textbooks

Related questions

Q: The government engages in expansionary fiscal policy, increasing aggregate demand by $10 billion.…

A: The formula to obtain aggregate demand in a closed economy is AD = consumption + investment +…

Q: During the recent recession sparked by financial crisis, the U.S. economy suffered tremendously.…

A: A recession is a significant decline in economic activity across the economy, lasting for an…

Q: 2. Discretionary fiscal policy and multiplier effects Consider a hypothetical economy in which the…

A: Inflationary Gap refers to a situation when the actual GDP is greater than the potential full…

Q: 9. Use of discretionary policy to stabilize the economy Should the government use monetary and…

A: The economy is producing natural rate of output at long run aggregate supply curve.

Q: The graph below depicts an economy where a decline in aggregate demand has caused a recession.…

A: The recessionary gap occurs when the country's real GDP is lower than the full employment GDP of the…

Q: Consider an economy located near the Indian Ocean where the main industries are agriculture and…

A: In the face of globalization, the practice of maintaining budget deficits has gained favor. Most…

Q: Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional…

A: The spending multiplier calculates how quickly total spending will change in response to a change in…

Q: The "crowding-out secondary effect expansionary macroeconomic policy a) For fiscal policy it is…

A: The crowding out effect is an economic theory arguing that rising public sector spending drives down…

Question

5. Supply-side effects
Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand (AD) curve and short-run
aggregate supply (AS) curve for the economy. The long-run aggregate supply curve is represented by a vertical line at the potential GDP level of $6
trillion. The economy is initially producing at potential GDP.
Suppose that fiscal authorities decide to decrease marginal tax rates. Assume that this change in marginal tax rates is perceived as a long-term
change.
Shift the appropriate curves to illustrate the supply-side view of the fiscal policy effect on output and the price level.
Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back
to its original position, just drag it a little farther
8
100
8
PRICE LEVEL
8
9
8
True
Potential GDP
O False
AS
AD
10
QUANTITY OF OUTPUT (Trillions of dollars)
12
True or False! Supply side economics is a short-run, countercyclical strategy.
AS
Potential GDP

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: Define Aggregate supply

VIEW

Step 2: Illustrate the diagram

VIEW

Step 3: Explain the correct option

VIEW

Solution

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 4 steps with 3 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Name some economic events not related to government policy that could cause aggregate demand to shift.
On a microeconomic demand curve, a decrease in price causes an increase in quantity demanded because the product in question is now relatively less expensive than substitute products. Explain why aggregate demand does not increase for the same reason in response to a decrease in the aggregate price level. In other words, what causes total spending to increase if it is not because goods are now cheaper?
If the economy is operating In the Keynesian zone of the SRAS curve and aggregate demand falls, what is likely to happen to real GDP?
How would a dramatic increase in the value of the stock market shift the AD curve? What effect would the shift have on the equilibrium level of GDP and the price level?
What are the components of the aggregate demand (AD) curve?
What is a potential problem with a temporary tax increase designed to increase aggregate demand it people know that it is temporary?
Suppose concerns about the size of the federal budget deficit lead the U.S. Congress to cut all funding for research and development for ten years. Assuming this has an impact on technology growth, what does the AD/AS model predict would be the likely effect on equilibrium GDP and the price level?
Suppose the Federal Reserve begins to Increase the supply of money at an Increasing rate. What Impact would that have on GDP, unemployment, and inflation?
Name some government policies that cod cause aggregate demand to shift.
A policymaker claims that tax cuts led the economy out of a recession. Can we use the AD/AS diagram to show this?