Consider the economy represented by the aggregate supply-aggregate demand graph below, which is initially at a short-run equilibrium at point A. Suppose taxes increase. How would this affect the economy? Price level (GDP deflator, 2009 = 100) PI Employment will increase. LRAS₁ Inflation will increase. Economic growth will decrease. Unemployment will decrease. SRASI GDP GDP₁ Real GDP (trillions of 2009 dollars) AD₁

Consider the economy represented by the aggregate supply-aggregate demand graph below, which is initially at a short-run equilibrium at point A. Suppose taxes increase. How would this affect the economy? Price level (GDP deflator, 2009 = 100) PI Employment will increase. LRAS₁ Inflation will increase. Economic growth will decrease. Unemployment will decrease. SRASI GDP GDP₁ Real GDP (trillions of 2009 dollars) AD₁

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Price Level(average price) 40 38 36 34 32 AD 1 30 28 26 24 22 20 0 AD 2 2 4 AD 3 AS 6 8 10 12 14 16 18 20 Real Output (quantity in billions per year) Suppose the economy is at full employment when AD = AD3. a. The GDP gap when the demand curve is at AD2 is $ 7 billion b. Would this mean the economy is in a recession or expansion? Recession
If the economy depicted in the graph below is self-correcting, then: LRAS Price SRAS Level C AD Real GDP SRAS will shift leftward and the economy will move to a new equilibrium at point B. AD will shift leftward and the economy will move to a new equilibrium at point C. SRAS will shift rightward and the economy will move to a new equilibrium at point C. AD will shift rightward and the economy will move to a new equilibrium at point B.
If membership falls in labor unions and unions become less popular, then: production costs will increase, SRAS will shift to the left, decreasing equilibrium GDP and increasing the aggregate price level. production costs will fall, SRAS will shift to the right, increasing equilibrium GDP and lowering the aggregate price level. production costs will not change, AD will shift to the right, increasing equilibrium GDP and aggregate price level. production costs will fall, there will be a downward movement along SRAS, equilibrium GDP will increase and aggregate price level will fall.
Assume that the economy is initially operating at the natural level of output. Graphically illustrate (using the IS-LM-PC model) how the economy adjusts to a decrease in taxes both in the short run and in the medium run.
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