E. The central bank decides to cut the money supply F. US dollar appreciates against other currencies G. The government cuts its spending on infrastructure H. The government of a country the US trades with introduces tariffs on US-produced goods I. There is a stock market crash. For each shock: 1) explain which component of aggregate expenditure would the shock affect and why; 2) Illustrate in the (Y, P) coordinates how the shock would affect the position of the AD curve 3) explain how the shock would affect equilibrium output and the price level in the economy according to the classical school of economic thought (aka the long run approach)
E. The central bank decides to cut the money supply F. US dollar appreciates against other currencies G. The government cuts its spending on infrastructure H. The government of a country the US trades with introduces tariffs on US-produced goods I. There is a stock market crash. For each shock: 1) explain which component of aggregate expenditure would the shock affect and why; 2) Illustrate in the (Y, P) coordinates how the shock would affect the position of the AD curve 3) explain how the shock would affect equilibrium output and the price level in the economy according to the classical school of economic thought (aka the long run approach)
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Parts E-H
Transcribed Image Text:Consider the following shocks:
A. The government cuts the personal income tax
B. Firms expect a recession in the coming years
C. A country the US trades with experiences an economic slowdown
D. The government cuts unemployment benefits
E. The central bank decides to cut the money supply
F. US dollar appreciates against other currencies
G. The government cuts its spending on infrastructure
H. The government of a country the US trades with introduces tariffs on US-produced goods
I. There is a stock market crash.
For each shock: 1) explain which component of aggregate expenditure would the shock affect and why;
2) Illustrate in the (Y, P) coordinates how the shock would affect the position of the AD curve 3)
explain how the shock would affect equilibrium output and the price level in the economy according to
the classical school of economic thought (aka the long run approach)
Expert Solution
Step 1
In the long run, Classical AS depicts the output is at the level of full employment and by increasing the employment it becomes impossible for increasing the output due to people being fully employed. Any effort for causing an increase in the output level by the government would lead to an increase in prices.
Note: As per the student's request, parts of e-h have been answered.
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