a.
To draw: Labeled graph for aggregated
a.
Explanation of Solution
Referring to the graph, the equilibrium is attained when aggregated demand and
Demand and Supply: Demand refers to the curve that depicts the relationship between the quantity demand at given
b.
The impact on short-run real
b.
Explanation of Solution
If government spending is decreased, then price level will be reduced and the aggregate demand curve AD1 will shift towards left i.e. AD2. GDP will shift to y2.
Demand and Supply: Demand refers to the curve that depicts the relationship between the quantity demand at given price whereas supply refers to the curve that depicts the relationship between the quantity that supplier is ready to sell at given price.
c.
The impact on GDP and price level in long-run.
c.
Explanation of Solution
There will be increase in real GDP if government spending decreases and prices will be reduced.
Demand and Supply: Demand refers to the curve that depicts the relationship between the quantity demand at given price whereas supply refers to the curve that depicts the relationship between the quantity that supplier is ready to sell at given price.
d.
The impact on interest rates on decrease in government spending if deficit is present.
d.
Explanation of Solution
The government spending will effect in interest rate which will lower it. This will effect in increasing GDP and higher savings. The demand curve will shift towards AD1.
Demand and Supply: Demand refers to the curve that depicts the relationship between the quantity demand at given price whereas supply refers to the curve that depicts the relationship between the quantity that supplier is ready to sell at given price.
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Chapter 45 Solutions
Krugman's Economics For The Ap® Course
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