**Economic Policy and Output: Understanding Shifts in Aggregate Demand and Supply**In economics, understanding how government policy impacts output and price levels is crucial. The diagram presented here illustrates the shifts in aggregate demand (AD) and short-run aggregate supply (SRAS) curves in response to such policies.### Diagram Explanation- **Axes:** - The horizontal axis represents Output (in trillions of dollars), ranging from 20 to 30. - The vertical axis indicates the Price Level, from 50 to 150.- **Curves:** - **AD Curves:** Two aggregate demand curves are shown. - **AD1** (blue) is the initial demand curve. - **AD2** (grey) represents a potential shift in the demand curve. - **SRAS Curve:** The short-run aggregate supply curve (orange) responds to shifts in economic scenarios. - **LRAS Curve** (purple): The long-run aggregate supply remains constant, representing potential output.- **Intersection Points:** - The intersection of the SRAS and AD curves denotes the current equilibrium output and price level. - The LRAS line represents potential output, where the economy would ideally operate.### Scenario AnalysisSuppose in February, the government implements a policy aimed at returning to potential output. By April, U.S. imports increase due to the removal of trade restrictions on Japanese goods. The timing, or *lags*, in implementing fiscal policy means the new policy’s impact on the economy will manifest over time, eventually restoring equilibrium.### ConclusionGovernment interventions can lead to shifts in the AD or SRAS curves to achieve desired economic conditions. Recognizing the timing and effects of these shifts is vital for managing economic output efficiently. The image presents a list of potential economic outcomes:1. Leave the U.S. economy unchanged.2. Leave the economy above potential output.3. Push the economy below potential output.4. Decrease the long-run production capacity.Each option describes a different scenario regarding the economy's position relative to its potential output or long-run production capacity.

Contractionary policy is an appropriate alternative as real GDP>potential GDP. Thus, aggregate…

Depending on which curve is affected by the government policy, shift either the SRAS curve or the AD curve to reflect the change that would successfully restore potential output. 150 SRAS AD 130 SRAS 110 AD 70 AD LRAS 50 20 22 24 26 28 30 OUTPUT (Trillions of dollars) Suppose that in February the government undertakes the type of policy required to bring the economy back to potential output given in the previous scenario. In April 2020, U.S. imports increase because the United States has eliminated trade restrictions on Japanese goods. Because of the lags associated with implementing fiscal policy, the impact of the government's new policy will likely once the effects of the policy are fully realized. PRICE LEVEL

Depending on which curve is affected by the government policy, shift either the SRAS curve or the AD curve to reflect the change that would successfully restore potential output. 150 SRAS AD 130 SRAS 110 AD 70 AD LRAS 50 20 22 24 26 28 30 OUTPUT (Trillions of dollars) Suppose that in February the government undertakes the type of policy required to bring the economy back to potential output given in the previous scenario. In April 2020, U.S. imports increase because the United States has eliminated trade restrictions on Japanese goods. Because of the lags associated with implementing fiscal policy, the impact of the government's new policy will likely once the effects of the policy are fully realized. PRICE LEVEL

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

During the current economic crisis caused by COVID 19, the Australian authorities have used both monetary and fiscal policy to try and minimise unemployment. (a) Use the dynamic AD-AS model to describe the impact of the crisis on the economy. Be sure to comment on its effect on both the demand and supply side in your answer. b) Using the same model, discuss and show in a diagram how the correct fiscal policy may offset the impact of the COVID effects on the economy. Be sure to mention any practical issues that may modify your answer
Explain the fiscal and monetary policy used in the attached document using IS model and the AD model
Figure 16-6 Price level 104 100 LRAS, LRAS₂ SRAS, SRAS₂ AD₂ Refer to Figure 16-6. In the dynamic model of AD-AS in the figure above, if the economy is at 0 $10 11 11.3 Real GDP point A in year 1 and is expected to go to point B in year 2, Congress and the president would most likely O increase the money supply and decrease the interest rate. O increase taxes. ● increase government spending. O increase oil prices. Oraise interest rates.
Draw diagram of a typical IS-LMmodel and indicate the changes in all the variables on the diagram should there be an increase in aggregate expenditure causing a shift of the IS curve to the right ( indicate the shift in the IS curve on your diagram) Indicate where macroequilibrium will be and properly label the axes on the diagram. Briefly explain what you understand such an IS-LM model is actually reflecting in terms of macroeconomics
Required information AD Real Domestic Product, GDP fer to the above graph. Which of the following factors explains a movement along the AD curve? Multiple Choice Multiple Choice Changes in the ability of household to borrow funds The degree of excess capacity in the economy Real interest-rate changes implemented by the government The interest-rate effect or real-balances effect Price Level
5
Extra Credit The economy of the country Keinesia is heavily dependent on imported oil. Due to a crisis in the Middle East, the oil price has sharply increased. 1. What do you expect to happen to the equilibrium output and prices? Use the AD-AS model to illustrate it. 2. You are the economic adviser to the president of Keinesia. a. Would you advise him/her to implement Fiscal Policy? b. What type of Fiscal Policy would you recommend? c. Illustrate the effect of the Fiscal Policy on the equilibrium output and prices? Use the AD- AS model in part (a) to illustrate it.
of The economy of Langoria is currently in a state of long-run equilibrium in which the economy is producing at its Natural Real GDP. The level of Real GDP is currently 3 trillion dollars, and the price level is 130. 100 PRICE LEVEL 170 160 150 140 130 120 110 100 2 Changes in a Self-Regulating Economy AD AD₂ BRAS 1 2 3 LRAS 23
Refer to the diagram that shows an AD/AS model for a hypothetical economy. Suppose the economy is in a short-run equilibrium at Y₁. An appropriate fiscal policy for attaining potential output (Y*) is a(n) O A. decrease in current imports. O B. increase in personal and corporate taxes. O C. decrease in current consumption. O D. increase in exports. Po B Y₁ Real GDP AD G
The graph below shows the AD-AS diagram for the US. Suppose that the economy is initially in long-run equilibrium with the price level of 700 (Red AD and SRAS curves). Now suppose that dollar depreciates. Price Level 1200 1100- 1000 900 800 700- 600* 500 400- 300- 200- 100 HITTE 100 200 300 400 500 Real GDP As a result of this event what is the new short-run price level? 600 700 800 900 1000 1100 120 Q
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.
AS1 110 A 100 AD2 AD1 900 960 1100 Real GDP FIGURE 23-5 Refer to Figure 23-5. Suppose that an increase in government purchases by 40 causes the AD curve to shift to the right, as shown. The simple multiplier is and the multiplier is 5; 1.5 4; 1.2 4; 1.5 O 4; 2.8 O 5; 1.2 Price Level