Explain, with the aid of three separate IS-LM-FE diagrams, how a decrease in government purchases will affect real output, real interest rate and the general price level in three steps: (i) before the general price level adjusts; (ii) when the general price level is adjusting; (iii) after the price adjustment process is completed.

Explain, with the aid of three separate IS-LM-FE diagrams, how a decrease in government purchases will affect real output, real interest rate and the general price level in three steps: (i) before the general price level adjusts; (ii) when the general price level is adjusting; (iii) after the price adjustment process is completed.

MACROECONOMICS FOR TODAY

10th Edition

ISBN:9781337613057

Author:Tucker

Publisher:Tucker

Chapter10: Aggregate Demand And Supply

Section: Chapter Questions

Problem 5SQ

See similar textbooks

Similar questions

Based on the picture, explain what happens to the price level. Describe your answer.
Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation: Quantity of Output Supplied = Natural Level of Output + a x (Price LevelActuat Price LevelExpecte The Greek letter a represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that a = $2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 105. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 95, 100, 105, 110, and 115. ? 125 120 AS 115 110 105 LRAS 100 95 90 85 80 75 10 20 30 40 50 60 70…
Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Price Price Price AS2 AS, AS, AS2 AS, P2 P, P, AD AD, O Q2 Q, Quantity AD2 AD O Q, Q2 Quantity AD Q, Q, Quantity (A) (B) (C) Other things equal, a decline in investment spending caused by the interest-rate effect of a price-level increase is depicted by the: 1) shift of the AD curve in panel (A). 2) shift of the AS curve in panel (B). 3) move from point a to point b in panel (B). 4) move from point a to point c in panel (C). P,
Assuming that GDP is fixed, fill in the missing values for Total Amount of Money Demanded Transactions demand = 1,050 Money Supply 1 (Ms1) = 2,850 Money Supply 2 (Ms2) = 2,250 Money Demanded for Total Amount of Rate of Interest Asset Purposes Money Demanded 18% 600 Number 16% 1,200 Number 14% 1,800 Number 12% 2,400 Number 10% 3,000 Number At money supply Ms1, the equilibrium interest rate is Number At money supply Ms2, the equilibrium interest rate is Number
Based on the picture, explain what happens to the aggregate demand. Describe your answer.
thanks in advance. YD = Y+TR-TA.
Explain verbally the case of an inflationary gap. Describe the forces in the economy that will result in the gap closing itself
Explain each options
Below is a graphical model of the AS-AD. In this model, the initial level of the economy is at low output and low inflation. Describe what happens to the economy when the BSP decides to lower interest rate and most likely this will lead to an increase in money supply thereafter. Answer the following guide questions. Based on the graph. What happens to the aggregate demand? Describe your answer.
Suppose that a given economy, in which the level of production (Y) is not at the natural level (Yn), an economy in which Y#Yn. 1) Using the AS/AD model, give an explanation of what will happen in the future and suggest a fiscal and/or a monetary policy to adjust the output and further analyse the effect of the suggested policy on employment and price level. 2) Illustrate your answer in part 1) by presenting and analysing data from the UK by identifying two occasions since 1950 (each covering a span of 2-5 years), where such an adjustment process occurred.
Assuming that at equilibrium real money supply (M$/P) is equal to real money demand (Md /P), which is assumed to be a function of real income (Y), nominal interest rate (R), and technology (A) as follows: MS Y =A- R P (a) Specify the assumptions needed to uphold the prediction of quantity theory of money claiming that the ratio of money to GDP is constant in the long run.e (b) Assuming that the growth rate of Y is 4%, the growth rate of R is 0, and the growth rate of A is -1%, draw a diagram to indicate the relation between growth rate of MS (on the X-axis) and inflation rate (on the Y-axis).
(2) With the help of aggregate supply (AS) and aggregate demand (AD) curves, describe the effects of the following events on the price level and on equilibrium GDP in the short run and the long run, assuming that input prices fully adjust to output prices after some lag.< ■ (i) An increase in the money supply with GDP being below its potential. (ii) Advancement in information technology in the 1990s.