Kk.175. **Understanding Fiscal Policy Impacts on Short-Run Economic Equilibrium****Scenario:**The economy is initially in long-run equilibrium. The government enacts a policy to decrease taxes, intending to stimulate economic activity. In the short-run, this expansionary fiscal policy will produce changes in the price level and output.**Question:**What will be the short-term effects of this expansionary fiscal policy?**Answer Options:**A) A shift from SRAS₂ to SRAS₁ and a movement to point D, with a higher price level and lower output. B) A shift from AD₂ to AD₁ and a movement to point C, with a lower price level and the same output. C) A shift from AD₁ to AD₂ and a movement to point B, with a higher price level and higher output. D) A shift from SRAS₁ to SRAS₂ and a movement to point B, with a lower price level and higher output.**Graph Explanation:**The graph presents the following curves:- **SRAS₁ and SRAS₂ (Short-Run Aggregate Supply Curves):** SRAS₁ is the initial short-run aggregate supply curve, and SRAS₂ is the new short-run aggregate supply curve after a shift.- **AD₁ and AD₂ (Aggregate Demand Curves):** AD₁ represents the initial aggregate demand, while AD₂ is the new aggregate demand after the fiscal policy is enacted.- **LRAS (Long-Run Aggregate Supply Curve):** This vertical line represents long-run aggregate supply and indicates the level of potential output or full-employment output.**Key Points on the Graph:**- **Point A:** Intersection of AD₁ and LRAS.- **Point B:** Intersection of AD₂ and SRAS₁.- **Point C:** Intersection of AD₁ and SRAS₂.- **Point D:** Intersection of AD₂ and LRAS.**Correct Answer:**C) A shift from AD₁ to AD₂ and a movement to point B, with a higher price level and higher output.**Explanation:**In response to a decrease in taxes, consumers have more disposable income, leading to an increase in aggregate demand. Thus, the AD curve shifts from AD₁ to AD₂. The new equilibrium occurs at point B, where the AD₂ curve intersects with the SRAS₁ curve. This results in a higher

Keynesian theory developed by the economist John Maynard Keynes, proposes the government's…

Suppose the economy is initially in long-run equilibrium. The government enacts a policy to decrease taxes. In the short-run, this expansionary fiscal policy will cause: OA. A shift from SRAS₂ to SRAS, and a movement to point D, with a higher price level and lower output. OB. A shift from AD₂ to AD, and a movement to point C, with a lower price level and the same output. OC. A shift from AD, to AD₂ and a movement to point B, with a higher price level and higher output. OD. A shift from SRAS, to SRAS₂ and a movement to point B, with a lower price level and higher output. CIT Price Level 122 120- 118- 116- 114 112- 110- 108- 106- 104- 102- 100- 98- 96- 94- 92- 90+ 0 D LRAS 10 B SRA SRA 8 10 12 Real GDP (trillions of 2000 dollars) AD: AD. 14

Suppose the economy is initially in long-run equilibrium. The government enacts a policy to decrease taxes. In the short-run, this expansionary fiscal policy will cause: OA. A shift from SRAS₂ to SRAS, and a movement to point D, with a higher price level and lower output. OB. A shift from AD₂ to AD, and a movement to point C, with a lower price level and the same output. OC. A shift from AD, to AD₂ and a movement to point B, with a higher price level and higher output. OD. A shift from SRAS, to SRAS₂ and a movement to point B, with a lower price level and higher output. CIT Price Level 122 120- 118- 116- 114 112- 110- 108- 106- 104- 102- 100- 98- 96- 94- 92- 90+ 0 D LRAS 10 B SRA SRA 8 10 12 Real GDP (trillions of 2000 dollars) AD: AD. 14

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Kk.175.

**Understanding Fiscal Policy Impacts on Short-Run Economic Equilibrium**

**Scenario:**
The economy is initially in long-run equilibrium. The government enacts a policy to decrease taxes, intending to stimulate economic activity. In the short-run, this expansionary fiscal policy will produce changes in the price level and output.

**Question:**
What will be the short-term effects of this expansionary fiscal policy?

**Answer Options:**
A) A shift from SRAS₂ to SRAS₁ and a movement to point D, with a higher price level and lower output.
B) A shift from AD₂ to AD₁ and a movement to point C, with a lower price level and the same output.
C) A shift from AD₁ to AD₂ and a movement to point B, with a higher price level and higher output.
D) A shift from SRAS₁ to SRAS₂ and a movement to point B, with a lower price level and higher output.

**Graph Explanation:**
The graph presents the following curves:
- **SRAS₁ and SRAS₂ (Short-Run Aggregate Supply Curves):** SRAS₁ is the initial short-run aggregate supply curve, and SRAS₂ is the new short-run aggregate supply curve after a shift.
- **AD₁ and AD₂ (Aggregate Demand Curves):** AD₁ represents the initial aggregate demand, while AD₂ is the new aggregate demand after the fiscal policy is enacted.
- **LRAS (Long-Run Aggregate Supply Curve):** This vertical line represents long-run aggregate supply and indicates the level of potential output or full-employment output.

**Key Points on the Graph:**
- **Point A:** Intersection of AD₁ and LRAS.
- **Point B:** Intersection of AD₂ and SRAS₁.
- **Point C:** Intersection of AD₁ and SRAS₂.
- **Point D:** Intersection of AD₂ and LRAS.

**Correct Answer:**
C) A shift from AD₁ to AD₂ and a movement to point B, with a higher price level and higher output.

**Explanation:**
In response to a decrease in taxes, consumers have more disposable income, leading to an increase in aggregate demand. Thus, the AD curve shifts from AD₁ to AD₂. The new equilibrium occurs at point B, where the AD₂ curve intersects with the SRAS₁ curve. This results in a higher

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