A country is currently in a recession. ( a. Illustrate this economy on a fully-labeled aggregate demand-aggregate supply model. Include aggregate demand, short-run aggregate supply, and long-run aggregate supply. i. Label the short-run equilibrium price level PLE and the short-run equilibrium output YE- ii. Label the full-employment level of output YF. b. If the government and central bank do not intervene, how would this economy adjust in the long run? Explain. c. Illustrate the process of part (b) on your graph from part (a). d. The government decides to use fiscal policy to correct the economic situation in part (a). Assume the difference between the short-run and long-run equilibrium output is worth $36 billion, and the marginal propensity to consume is 0.75. Calculate one specific and effective fiscal policy action the government could take. e. What would be the short-run impact of the government's action on the economy's real output? f. What would be the short-run impact of the government's action on the potential output of the economy? g. Will the long-run equilibrium price level if the government intervenes be less than, equal to, or greater than the long-run equilibrium price level without intervention?

A country is currently in a recession. ( a. Illustrate this economy on a fully-labeled aggregate demand-aggregate supply model. Include aggregate demand, short-run aggregate supply, and long-run aggregate supply. i. Label the short-run equilibrium price level PLE and the short-run equilibrium output YE- ii. Label the full-employment level of output YF. b. If the government and central bank do not intervene, how would this economy adjust in the long run? Explain. c. Illustrate the process of part (b) on your graph from part (a). d. The government decides to use fiscal policy to correct the economic situation in part (a). Assume the difference between the short-run and long-run equilibrium output is worth $36 billion, and the marginal propensity to consume is 0.75. Calculate one specific and effective fiscal policy action the government could take. e. What would be the short-run impact of the government's action on the economy's real output? f. What would be the short-run impact of the government's action on the potential output of the economy? g. Will the long-run equilibrium price level if the government intervenes be less than, equal to, or greater than the long-run equilibrium price level without intervention?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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