Chapter 45, Problem 1CYU

a.

To determine

To draw: Labeled graph for aggregated demand and supply showing long-run macroeconomic equilibrium.

Explanation of Solution

  

Referring to the graph, the equilibrium is attained when aggregated demand and aggregated supply curves meet.

Economics Concept Introduction

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.

b.

To determine

The impact on short-run real GDP and price level if government spending is decreased.

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.

Economics Concept Introduction

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.

To determine

The impact on GDP and price level in long-run.

Explanation of Solution

There will be increase in real GDP if government spending decreases and prices will be reduced.

Economics Concept Introduction

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.

To determine

The impact on interest rates on decrease in government spending if deficit is present.

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.

Economics Concept Introduction

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.