Chapter 40, Problem 2FRQ

a)

To determine

A graph that shows the SRAS curve, LRAS curve, and AD curve when an expansionary fiscal policy move economy from recession.

Explanation of Solution

The following graph shows a fiscal policy that is expansionary and helps to remove recession:

  

When the government takes action to lower tax rates or increase government expenditure, the aggregate demand curve is moved to the right. This is known as expansionary fiscal policy. Here, Tax reductions, refunds, greater public investment, etc. all come under the expansionary fiscal policy that might boost discretionary government expenditure, injecting additional cash into the economy via government contracts. In this case, applying fiscal policy which is expansionary shifts the demand to the right or upward. This also helps to remove the recession in the economy.

Economics Concept Introduction

Introduction: At the point where the aggregate demand curve and the aggregate supply curve connect, macroeconomic equilibrium takes place when the amount of real GDP requested and supplied is equal.

b)

To determine

A graph when investment in infrastructure by the government will result in long-run growth.

Explanation of Solution

The following graph represents the investment in infrastructure by the government that leads to long-run economic growth:

  

Investment in infrastructure has the potential to result in these restrictive labor markets which might immediately result in a return to productivity growth and it affects the long-run economic growth by increasing production which shifts the long-run aggregate supply curve and aggregate demand curve to the right. Growth is impacted by infrastructure in a number of supply and demand side channels as growth is directly dependent on investments in some sources such as energy, telecommunications, and transportation networks.

Economics Concept Introduction

Introduction: The capacity of an economy to generate more goods and services over time is referred to as long-run growth. And, along with price and supply and demand, a nation's GDP and population growth are closely related to each other.