Question 6 Demand management can be used by both fiscal and monetary policy. Suppose that fiscal policy makers decide to employ an expansionary policy in the aim to stimulate a weak economy. 6.1. Explain how fiscal policy can use both policy instruments at their disposal to stimulate an economy. 6.2. Based on your answer (6.1), illustrate, and explain by aid of the AD-AS model what the identified policy employment by Fiscal Authorities will have on the general price level and the level of real production and income in the economy. 6.3. Illustrate and explain by aid of the Phillips curve, how demand-pull inflation impacts the relationship between unemployment and the inflation rate. [Tip: Include arrows to illustrate the correct direction of all movements and changes in your illustration].

Question 6 Demand management can be used by both fiscal and monetary policy. Suppose that fiscal policy makers decide to employ an expansionary policy in the aim to stimulate a weak economy. 6.1. Explain how fiscal policy can use both policy instruments at their disposal to stimulate an economy. 6.2. Based on your answer (6.1), illustrate, and explain by aid of the AD-AS model what the identified policy employment by Fiscal Authorities will have on the general price level and the level of real production and income in the economy. 6.3. Illustrate and explain by aid of the Phillips curve, how demand-pull inflation impacts the relationship between unemployment and the inflation rate. [Tip: Include arrows to illustrate the correct direction of all movements and changes in your illustration].

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

This is a 3 part question. Thank you
Do you believe that the Hayek’s classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not?
Q17. Summarize the Keynesian model: A. The Keynesian model emphasizes aggregate supply by focusing on the underlying determinants of output and employment in markets, and thus tends to put more emphasis on economic growth and how labor markets work. B. The short-term Keynesian model is built on the importance of aggregate demand as a cause of business cycles and a degree of wage and price rigidity, and thus does a sound job of explaining many recessions and why cyclical unemployment rises and falls. C. The short-term Keynesian model is built on the importance of aggregate supply as a cause of business cycles and a degree of wage and price rigidity, but does a poor job of explaining many recessions and why cyclical unemployment rises and falls.
Q.1.4 Which of the following statements about Fiscal Policy is INCORRECT? (a) In order to combat inflation, the South African Reserve Bank must apply a contractionary fiscal policy; (b) A contractionary fiscal policy can result in higher levels of unemployment; (c) Expansionary fiscal policy will increase the budget deficit; (d) The application of fiscal policy will have no effect on aggregate supply in the AD-AS model.
Attached: figure 1: Hayek’s (Classical) AD-AS Model Question 1 Why does Hayek’s aggregate supply curve always lead to an equilibrium level of national output equal to the full-employment level of real GDP? Question 2 Hayek says that markets will heal themselves and that government should not intervene. How does the AD-AS model reflect Hayek’s idea that governments cannot increase real GDP beyond the level that the free market economy is able to produce? Question 3 Do you believe that the Hayek’s classical AD-AS model explain the factors that cause changes (shifts) in AS realistically? Why or why not?
Draw and properly label an AD-AS model to show Keynesian, intermediate, and neoclassical zones. Then, briefly explain the levels of unemployment, inflation and real GDP in each zone, and also confirm whether all three goals of a macro economy are being achieved in each zone. 2. Draw and properly label the AD-AS graphs or one AD-AS graph to show recessionary and inflationary gaps. Then, discuss in detail how Keynesians suggest that recessionary and inflationary gaps be closed. 3. Draw and properly label AD-AS graphs or one AD-AS graph to show recessionary and inflationary gaps. Then, discuss in detail how neoclassicals suggest that recessionary and inflationary gaps be closed.
Identify the most significant sources of disruption over the past several years and propose policies to address them. Consider the following factors in your response: How will your policy recommendations impact Aggregate Demand and Supply? Discuss the potential trade-offs associated with different program options. Evaluate the effects of the proposed policies on future economic growth possibilities, including their impact on the Production Possibility Frontier (PPF) and long-run aggregate supply. Analyze the potential effects of the policies on debt and budget deficits. Assess the impact of the policies on private investment and discuss whether crowding out is a concern in the short run versus the long run. Examine how your proposals may affect income distribution, consumer confidence, and spending. Predict the potential effects of your policy recommendations on GDP growth, price levels, and employment.
Let's say you are the chair of economic advisors to the president. Assume that the economy, as depicted in an AD/AS framework is at: potential (full employment) output, The intersection of the SRAD, SRAS, and LRAS, all intersect at the level of potential (full employment) output and a corresponding price level ( or an acceptable rate of inflation). The economy's mpc is .75, which is presumed to remain constant. Now, global problems emerge, and the US decided to produce many new fighter jets immediately to the region under duress. The new jets will cost $55 b., and other expenditures by the government cannot be cut. The president is concerned that the new expenditures will create an inflation, but needs to produce the new jets immediately. What policies would you propose, that would enable the country to produce the new jets, without creating an inflation? Use the AD/AS framework to illustrate your answer. Assume any taxes are lump sum taxes. Specify the spending and taxing…
Explain the role of supply-side policies in the macro-economy. In the context of your analysis distinguish between New Classical and Keynesian approaches to supply side policies. Illustrate your answer with appropriate diagrams.