**7. Supply-side effects**Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand curve (AD) and short-run aggregate supply curve (SRAS) for the economy. The long-run aggregate supply curve (LRAS) is represented by a vertical line at $6 trillion. The economy is initially producing at potential output.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.*---**Graph Explanation:**- **Axes:** The graph has "PRICE LEVEL" on the vertical axis and "QUANTITY OF OUTPUT (Trillions of dollars)" on the horizontal axis.- **Curves:** - **AD (Aggregate Demand):** Downward sloping, indicating a negative relationship between price level and quantity of output. - **SRAS (Short-Run Aggregate Supply):** Upward sloping, indicating a positive relationship between price level and quantity of output. - **LRAS (Long-Run Aggregate Supply):** Vertical line at $6 trillion, representing the economy’s potential output level.- The purpose of the graph is to illustrate how a decrease in marginal tax rates, seen as a long-term change, could affect the supply side of the economy. To show these effects, adjustments to the position of the curves may be required to reflect changes in output and the price level.

Aggregate demand represent to amount that a producer is expecting to receive after the output…

7. Supply-side effects Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand curve (AD) and short-run aggregate supply curve (SRAS) for the economy. The long-run aggregate supply curve (LRAS) is represented by a vertical line at $6 trillion. The economy is initially producing at potential output. 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. 120 LRAS SRAS 100 AD 80 SRAS 60 LRAS 40 AD 20 2 8 10 12 QUANTITY OF OUTPUT (Trillions of dollars) PRICE LEVEL

7. Supply-side effects Consider a fictional economy that is operating at its long-run equilibrium. The following graph shows the aggregate demand curve (AD) and short-run aggregate supply curve (SRAS) for the economy. The long-run aggregate supply curve (LRAS) is represented by a vertical line at $6 trillion. The economy is initially producing at potential output. 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. 120 LRAS SRAS 100 AD 80 SRAS 60 LRAS 40 AD 20 2 8 10 12 QUANTITY OF OUTPUT (Trillions of dollars) PRICE LEVEL

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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8. Using policy to stabilize the economy The government possesses the tools necessary to influence the output level in the short run through use of monetary and fiscal policy. However, there is some debate regarding whether the government should attempt to stabilize the economy. Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply. The current tax system acts as an automatic stabilizer. Businesses make investment plans many months in advance. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. Changes in government purchases and taxation must be passed by both houses of Congress and signed by the president. Which of the following policies are examples of automatic stabilizers? Check all that apply. Personal income taxes The discount rate The federal funds rate
10 If Ricardian equivalence holds, and the marginal propensity to consume (MPC) is 0.75, What is the effect of a $100 reduction in taxes on aggregate demand (AD) ?
1. As a result of an economic policy change, interest rates fall, and consumption and investment rise. This is consistent witha) A monetary expansion.b) A fiscal expansion.c) A fiscal contraction.d) A monetary contraction. 2. Under what conditions might the application of fiscal and monetary policy simply cause a change in the price level, and no change the level of national income.a) The aggregate supply curve is horizontal.b) The aggregate supply curve is vertical.c) The short run aggregate supply curve is flatter than the long run aggregate supply curve.d) The long run aggregate supply curve is flatter than the short run aggregate supply curve. 3. How might government best attempt to address the threat of long-run, structural unemployment, resulting from the globalisation of the economic environment?a) Adopt protectionist measures, such as tariffs.b) Give trade unions a formal role in economic planning.c) Increase subsidies for job retention in manufacturing industry.d) Improve…
5) What factors will shift the aggregate demand curve for a given level of real domestic income?
TOPIC: Crowding Out.
A) Discuss, with examples, factors or events that might shift the short run aggregate supply curve. B) Imagine an economy is in long run equilibrium. Now suppose that firms experience an increase in their cost of production (say, due to a natural disaster). i. Explain, with graphs, the macroeconomic impact of such an increase in production costs. ii. Describe how policymakers could use fiscal policy to counteract the effects of increased cost of production.
The graph below depicts an economy where a decline in aggregate demand has caused a recession. Assume the government decides to conduct fiscal policy by increasing government purchases to reduce the burden of this recession. Price Level 160 140 LA 120 100 80 60 40 20 0 Fiscal Policy LRAS AD₁ Real GDP (billions of dollars) billion AS 80 160 240 320 400 480 560 640 720 800 AD O Instructions: Enter your answers as a whole number. a. How much does aggregate demand need to change to restore the economy to its long-run equilibrium? billion B b. If the MPC is 0.6, how much does government purchases need to change to shift aggregate demand by the amount you found in part a? Suppose instead that the MPC is 0.75. c. How much does aggregate demand and government purchases need to change to restore the economy to its long-run equilibrium? Aggregate demand needs to change by $ billion and government purchases need to change by $ billion.
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8. Refer to the diagrams. The multiplier associated with fiscal policy that increases aggregate demand from AD1 to AD2 is less in graph b than in a because: * AS AS AD, AD, AD, AD2 X YZ Real GDP 0. X YZ Real GDP (a) (b) Graph a represents a closed economy while b depicts an open economy. Inflation occurs in b and not in a The economy is in the vertical range of aggregate supply in a and not inb. Graph a represents an open economy while b depicts a closed economy. Price level Price level
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…
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