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ssume the government of an economy applies expansionary fiscal policy to stimulate aggregate demand. Explain the impact of his decision using the aggregate demand-aggregate supply model. Apply the ONE most relevant diagram from below to your answer. Which diagram is correct to support the above st

ssume the government of an economy applies expansionary fiscal policy to stimulate aggregate demand. Explain the impact of his decision using the aggregate demand-aggregate supply model. Apply the ONE most relevant diagram from below to your answer. Which diagram is correct to support the above st

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Assume the government of an economy applies expansionary fiscal policy to stimulate aggregate demand. Explain the impact of his decision using the aggregate demand-aggregate supply model. Apply the ONE most relevant diagram from below to your answer. Which diagram is correct to support the above statement.
**Aggregate Demand and Aggregate Supply Analysis: Understanding Economic Equilibrium** This educational article explains important concepts related to economic equilibrium using two diagrams illustrating the interaction between aggregate demand (AD) and aggregate supply (AS). ### Diagram A: Shifts in Aggregate Demand **Description:** Diagram A shows the relationship between the price level and output in the economy, depicted through curves representing Aggregate Demand (AD) and Aggregate Supply (AS). **Components:** 1. **Aggregate Demand Curves (AD1 and AD2):** - **AD1:** Initial Aggregate Demand curve. - **AD2:** New Aggregate Demand curve after a shift. 2. **Aggregate Supply Curve (AS1):** - **AS1:** Short-run Aggregate Supply curve. 3. **Axes:** - **Vertical Axis (Price Level):** Denotes the general price level in the economy. - **Horizontal Axis (Output):** Denotes the total output or Real GDP. **Explanation:** - The initial equilibrium is at the intersection of AS1 and AD1, resulting in a price level of P1 and an output level of Y1. - A leftward shift in the aggregate demand curve from AD1 to AD2 indicates a decrease in aggregate demand. - This shift results in a new equilibrium at a lower price level (P2) and a lower output level (Y2). - The arrows show the direction of the AD shift and its impact on both price level and output. ### Diagram B: Shifts in Aggregate Demand and Supply **Description:** Diagram B depicts short-run economic equilibrium using Aggregate Demand (AD) and Short-Run Aggregate Supply (SRAS) curves. **Components:** 1. **Aggregate Demand Curves (AD and AD1):** - **AD:** Original Aggregate Demand curve. - **AD1:** New Aggregate Demand curve after a shift. 2. **Short-Run Aggregate Supply Curve (SRAS):** - **SRAS:** Depicts the short-run supply response of producers. 3. **Axes:** - **Vertical Axis (Price Level):** Denotes the general price level in the economy. - **Horizontal Axis (Output, Real GDP):** Denotes the total output or Real GDP. **Explanation:** - Initial equilibrium is at the intersection of the AD and SRAS curves, producing an output level of Y0 and a price level of P0.
Transcribed Image Text:**Aggregate Demand and Aggregate Supply Analysis: Understanding Economic Equilibrium** This educational article explains important concepts related to economic equilibrium using two diagrams illustrating the interaction between aggregate demand (AD) and aggregate supply (AS). ### Diagram A: Shifts in Aggregate Demand **Description:** Diagram A shows the relationship between the price level and output in the economy, depicted through curves representing Aggregate Demand (AD) and Aggregate Supply (AS). **Components:** 1. **Aggregate Demand Curves (AD1 and AD2):** - **AD1:** Initial Aggregate Demand curve. - **AD2:** New Aggregate Demand curve after a shift. 2. **Aggregate Supply Curve (AS1):** - **AS1:** Short-run Aggregate Supply curve. 3. **Axes:** - **Vertical Axis (Price Level):** Denotes the general price level in the economy. - **Horizontal Axis (Output):** Denotes the total output or Real GDP. **Explanation:** - The initial equilibrium is at the intersection of AS1 and AD1, resulting in a price level of P1 and an output level of Y1. - A leftward shift in the aggregate demand curve from AD1 to AD2 indicates a decrease in aggregate demand. - This shift results in a new equilibrium at a lower price level (P2) and a lower output level (Y2). - The arrows show the direction of the AD shift and its impact on both price level and output. ### Diagram B: Shifts in Aggregate Demand and Supply **Description:** Diagram B depicts short-run economic equilibrium using Aggregate Demand (AD) and Short-Run Aggregate Supply (SRAS) curves. **Components:** 1. **Aggregate Demand Curves (AD and AD1):** - **AD:** Original Aggregate Demand curve. - **AD1:** New Aggregate Demand curve after a shift. 2. **Short-Run Aggregate Supply Curve (SRAS):** - **SRAS:** Depicts the short-run supply response of producers. 3. **Axes:** - **Vertical Axis (Price Level):** Denotes the general price level in the economy. - **Horizontal Axis (Output, Real GDP):** Denotes the total output or Real GDP. **Explanation:** - Initial equilibrium is at the intersection of the AD and SRAS curves, producing an output level of Y0 and a price level of P0.
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