Question 4Aggregate demand shocks and the medium runSuppose the economy begins with output equal to its natural level. Then, there is a reduction ingovernment expenditure.a. Using the AS-AD model developed in our lesson, show the effects of a reduction ingovernment expenditure on the position of the AD and AS curves in the medium run.b. What happens to output, the interest rate, and the price level in the medium run? Whathappens to consumption and investment in the medium run?Suppose that the Central Bank (CB) decides to respond immediately to the decline in thereduction of government expenditure in the short run. In particular, suppose that the CB wants toprevent the unemployment rate from changing in the short run after the government reduced thefiscal deficit.a. What should the CB do? Show how the CB's action, combined with the decline ingovernment expenditure, affects the AS-AD diagram in the short run and the medium run.2b. How do short-run output and the short-run price level compare to your answers from part(a)?c. How do the short-run and medium-run unemployment rates compare to your answers frompart (b)?

a. Assuming the economy is initially in the long-run equilibrium, then the economy is at A in the…

Aggregate demand shocks and the medium run Suppose the economy begins with output equal to its natural level. Then, there is a reduction in government expenditure. a. Using the AS-AD model developed in our lesson, show the effects of a reduction in government expenditure on the position of the AD and AS curves in the medium run. b. What happens to output, the interest rate, and the price level in the medium run? What happens to consumption and investment in the medium run?

Aggregate demand shocks and the medium run Suppose the economy begins with output equal to its natural level. Then, there is a reduction in government expenditure. a. Using the AS-AD model developed in our lesson, show the effects of a reduction in government expenditure on the position of the AD and AS curves in the medium run. b. What happens to output, the interest rate, and the price level in the medium run? What happens to consumption and investment in the medium run?

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section: Chapter Questions

Problem 2TY

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