The following graph shows a hypothetical economy in long-run equilibrium at an expected price level of 120 and a natural output level of $600 billion. Suppose the government increases spending on building and repairing highways, bridges, and ports. ### Understanding Economic Shifts: The Long-Run Impact of Government Spending**Objective:** Learn how price level expectations and curves shift during the transition from the short run to the long run, and how increased government spending affects aggregate demand and supply.#### Key Concepts:- **Short Run to Long Run Transition:** - Price level expectations will ________. - The ________ curve will shift to the _______.#### Using the Graph: The graph provided is crucial for understanding the long-run impact of increased government spending. It contains two curves:1. **Aggregate Demand (AD)** - Represented by a downward-sloping blue line.2. **Short-Run Aggregate Supply (AS)** - Represented by an upward-sloping orange line.**Graph Explanation:**- **X-Axis**: Measures output in billions of dollars.- **Y-Axis**: Measures the price level.- Intersection Point of AD and AS: Indicates the equilibrium price level and output.#### Analysis Task:Illustrate the long-run impact of the increased government spending by:- Shifting the Aggregate Demand (AD) curve appropriately.- Shifting the Short-Run Aggregate Supply (AS) curve in the appropriate direction.#### Expected Changes in the Long Run:- **Due to the increase in government spending:** - The price level ________. - The quantity of output ________ the natural level of output. - The unemployment rate ________ the natural rate.### Summary:This guide helps in analyzing the dynamic shifts in price levels, output, and unemployment rates due to changes in government spending, as depicted by the interactions of AD and AS curves. It demonstrates how economic policies can influence long-term economic stability. **Short-Run Impact of Increase in Government Spending on Aggregate Supply and Demand****Graph Analysis:**The graph presented illustrates the short-run aggregate supply (AS) curve and the aggregate demand (AD) curve. The vertical axis represents the price level, while the horizontal axis shows the output in billions of dollars.- The orange line labeled "AS" represents the short-run aggregate supply curve.- The blue line labeled "AD" represents the aggregate demand curve.Based on the initial equilibrium, the intersection of AS and AD determines the equilibrium price level and output.**Concept Explanation:**In the short run, an increase in government spending, particularly on infrastructure, leads to changes in the price level and output. According to economic principles:1. The price level may adjust to be either higher or lower than what people expected, due to increased demand for goods and services.2. The quantity of output may increase or decrease from the natural level of output depending on the economy's capacity to meet the new demand without inflationary pressures.3. Changes in government spending can affect the unemployment rate, potentially moving it above or below the natural unemployment rate in the short run.This dynamic response comes as the economy adjusts to the new levels of spending, causing shifts in both the AD and AS curves.**Detailed Example:**Consider a hypothetical economy currently in long-run equilibrium with:- An expected price level of 120- A natural output level of $600 billionIf the government increases spending on infrastructure, this will immediately affect the short-run equilibrium. For instance:- If the AD curve shifts rightward due to higher spending, this typically results in higher price levels and increased output.- Short-run unemployment may decrease as firms hire more workers to meet the new levels of demand.Over time, along the transition from the short run to the long run:- Price level expectations will adjust.- The economy might experience further shifts in the aggregate supply curve, typically aligning with the long-run aggregate supply (LRAS) to restore long-run equilibrium.**Activity:** To visually understand this, use the graph to shift the AD or AS curve to reflect the short-run impact of increased government spending on infrastructure.**Conclusion:** These adjustments illustrate the short-run economic impacts and transitional dynamics towards long-run equilibrium, reinforcing key macroeconomic concepts.

AD(aggregate demand) is the sum of C(consumption), I(investment ), G(government spending) and net…

Using the graph, shift the short-run aggregate supply (AS) c or the aggregate demand (AD) curve to show the short- run impact of the increase in government spending. PRICE LEVEL 240 200 160 80 40 0 200 400 600 800 OUTPUT (Billions of dollars) AS AD 1000 1200 AD AS In the short run, the increase in government spending on infrastructure causes the price level to the price leve the people expected and the quantity of output to natural level of output. The increase in government spendi will cause the unemployment rate to unemployment in the short run. the natural rate Again, the following graph shows a hypothetical economy experiencing long-run equilibrium at the expected price lev of 120 and natural output level of $600 billion, prior to the

Using the graph, shift the short-run aggregate supply (AS) c or the aggregate demand (AD) curve to show the short- run impact of the increase in government spending. PRICE LEVEL 240 200 160 80 40 0 200 400 600 800 OUTPUT (Billions of dollars) AS AD 1000 1200 AD AS In the short run, the increase in government spending on infrastructure causes the price level to the price leve the people expected and the quantity of output to natural level of output. The increase in government spendi will cause the unemployment rate to unemployment in the short run. the natural rate Again, the following graph shows a hypothetical economy experiencing long-run equilibrium at the expected price lev of 120 and natural output level of $600 billion, prior to the

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 1.8P

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Question: How does the concept of aggregate demand relate to overall economic output, and what factors can influence changes in aggregate demand? A) Aggregate demand represents the total wealth of a nation and is unaffected by external factors. B) Aggregate demand is the total spending in an economy and includes consumption, investment, government spending, and net exports; factors like changes in consumer confidence can influence it. C) Aggregate demand solely considers government spending and is unrelated to economic output. D) Aggregate demand is the total production in an economy and is determined solely by government policies.
(3) "The aggregate demand curve slope slopes downward because when the price level is lower, people can afford to buy more, lead to the rise in aggregate demand. When price rises, people can afford to buy less, resulting to the fall in aggregate demand. It is therefore very much an extension of the Law of Demand in Microeconomics." Is this a good explanation of the shape of the AD curve? Why or why not?
On a microeconomic demand curve, a decrease in price causes an increase in quantity demanded because the product in question is now relatively less expensive than substitute products. Explain why aggregate demand does not increase for the same reason in response to a decrease in the aggregate price level. In other words, what causes total spending to increase if it is not because goods are now cheaper?
Again, the following graph shows the economy in long-run equilibrium at the expected price level of 5 and potential output of $5 trillion before the decrease in foreign spending on domestic goods associated with the recession abroad. Now, on the following exhibit, show the long-run impact of the economic turmoil abroad by shifting both the short-run aggregate demand (AD) curve and the short-run aggregate supply (SRAS) curve to the appropriate positions. Assume that the economic turmoil abroad does not cause a change in the economy's resources, technology, or productivity.) Note: You will not be graded on any changes you make to the graph. VEL PRICE 10 2 0 0 2 LRAS 4 6 REAL GDP (Trillions of dollars) AD 8 SRAS 10 AD In the long run, as a result of the economic turmoil abroad, the price level potential output, and the unemployment rate -- SRAS During the transition from the short run to the long run, price level expectations will ▼curve will shift to the . (?) , and the ▼, the quantity…
6. Nonprice-level determinants of aggregate supply The following graph shows an increase in short-run aggregate supply (SRAS) in a hypothetical economy. Specifically, short-run aggregate supply shifts to the right from SRAS₁ to SRAS₂, causing the quantity of output supplied at a price level of 125 to rise from $250 billion to $350 billion. Review the graph and then complete the table that follows. PRICE LEVEL 200 175 150 125 100 75 50 25 0 0 50 I SRAS, 100 150 200 250 300 350 REAL GDP (Billions of dollars) Determinant Burdensome Regulations Tax Rates on Firms and Corporations Nominal Wage Rate SRAS₂ 400 The following table lists several determinants of short-run aggregate supply. Complete the table by indicating the change needed in each determinant to increase short-run aggregate supply. Change Needed to Increase SRAS
51) Which of the following both shift aggregate-demand curve to the right? an increase in taxes and at a given price level consumers feel more wealthy a decrease in taxes and at a given price level consumers feel less wealthy an increase in taxes and at a given price level consumers feel less wealthy a decrease in taxes and at a given price level consumers feel more wealthy
9 What are the determinants for aggregate demand and aggregate supply? How would an ideal aggregate demand and aggregate supply graph look like (describe the relationship/provide a graph/provide a link) and explain how each line would shift due to current economic occurrences. What changes could be made to encourage equilibrium
QUESTION 1 The aggregate demand curve: is upward sloping because a higher price level is necessary to make production profitable as production costs rise. is downward sloping because production costs decline as real output increases. O shows the amount of expenditures required to induce the production of each possible level of real output. O shows the amount of real output that will be purchased at each possible price level. O shows the various amounts of real output that businesses will produce at each price level.
Chapter: A simple model of macroeconomics: Fiscal policy and Monetary Policy Q) Using the Aggregate supply and Aggregate Demand Model, examine the influence of government expenditure on investment in a nation. Use Jot Inc. Ltd a multinational construction company in which you are the Chief Exec of the firm that that is highly diversified and recieves funds to construct highways and other government funded projects. Also, explain the factors that cause the Aggregate Demand curve to be downward sloping left to right.answer the questions from below figure.
2) Assume that the United States economy is currently in long-run equilibrium. a) Draw a correctly labeled graph of aggregate demand and aggregate supply and show each of the following. i. The long-run aggregate supply curve ii. The current equilibrium output and price levels, labeled as YE and PLE. b) Assume that the government increases spending on national defense without raising taxes. i. On your graph in part (a), show how the government action affects aggregate demand. ii. How will this government action affect the unemployment rate in the short run? Explain. c) Assume that the economy adjusts to a new long-run equilibrium after the increase in government spending. i. How will the short-run aggregate supply curve in the long-run equilibrium compare with that in the initial long-run equilibrium in part (a)? Explain. ii. On your graph in part (a), label the new long-run equilibrium price level as PL2.
Suppose that firms become very pessimistic about future business conditions and cut heavily on investment in capital equipment. [Label A, B, C for the initial, new short-run and new long-run equilibrium respectively] a)Use an aggregate-demand/aggregate-supply model to show the short-run effect of this pessimism on the economy. Label the new levels of prices and real output. Explain in words why the aggregate quantity of output supplied changes. (Use the sticky wage theory in your explanation)
1. Problems and Applications Q1 Suppose the economy is in a long-run equilibrium, as shown in the following graph. Now suppose that firms become pessimistic about future business conditions and decide to cut back on investment spending, resulting in a fall in aggregate demand. Use your diagram to show what happens to output and the price level in the short run. Price Level LRAS Aggregate Supply Aggregate Demand Quantity of Output As a result of this change, the unemployment rate Aggregate Demand Aggregate Supply LRAS ? Use the sticky-wage theory of aggregate supply to think about what will happen to output and the price level in the long run (assuming there is no change in policy).