In Vistulaland a closed economy with government and in long-run equilibrium, the governme decided to increase its spending *) Present the initial long-run equilibrium and the short-run equilibrium after the government spending increase on the graph below using the AD-AS model (Keynesian in the short run a Classical in the long run) Remember to denote the axes, schedules. b) Explain if output changes in the short run and if yes, what makes this change possible c) Describe (preferably in points) the adjustment process in this economy between the short-run and the new long-run equilibrium. Concentrate especially on describing what happens to the nominal and real interest rates, nominal and real wages, output, inflation and private spending. Assume that the bank decides not to maintain its inflation target. d) On the graph below show and explain the reaction of the central bank to the expansionary fiscal policy described above, i.e. from the beginning of the adjustment process to the new long-run equilibrium. (Hint: use the ii curve, remember to denote the axes, curve, etc.)

In Vistulaland a closed economy with government and in long-run equilibrium, the governme decided to increase its spending *) Present the initial long-run equilibrium and the short-run equilibrium after the government spending increase on the graph below using the AD-AS model (Keynesian in the short run a Classical in the long run) Remember to denote the axes, schedules. b) Explain if output changes in the short run and if yes, what makes this change possible c) Describe (preferably in points) the adjustment process in this economy between the short-run and the new long-run equilibrium. Concentrate especially on describing what happens to the nominal and real interest rates, nominal and real wages, output, inflation and private spending. Assume that the bank decides not to maintain its inflation target. d) On the graph below show and explain the reaction of the central bank to the expansionary fiscal policy described above, i.e. from the beginning of the adjustment process to the new long-run equilibrium. (Hint: use the ii curve, remember to denote the axes, curve, etc.)

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section: Chapter Questions

Problem 2TY

See similar textbooks

Similar questions

"H0w w0uld y0u define price stickiness ? H0w d0es this phen0men0n lead t0 an increase in the sh0rt run level 0f 0utput acc0rding t0 the Keynesians?" C0mment in simple w0rds
"H0w w0uld y0u define price stickiness ? H0w d0es this phen0men0n lead t0 an increase in the sh0rt run level 0f 0utput acc0rding t0 the Keynesians?" C0mment
H0w d0es price stickiness phen0men0n lead t0 an increase in the sh0rt run level 0f 0utput acc0rding t0 the Keynesians?H0w w0uld y0u define price stickiness ?
An economy's apgregate demand curve isven as AD 00.6SY, With an increase in foreign income, the level of exports increases by 235 bilion what wi happen to real GDP in thes ecanomy Select one 4 Real GDP wi increase by approimatly 02 blon O Maal GOe s unatfected by changes in expos Oc GOP wi dere y prmaly on O. R GOP wil de y pproimatty on O. el GO wil ince byrimaty 71 bon
Illustrate each of the following situations with a graphshowing AS and AD curves, and explain what happensto the equilibrium values of the price level and aggregateoutput:a. A decrease in G with the money supply held constant bythe Fedb. A decrease in the price of oil with no change ingovernment spendingc. An increase in Z with no change in governmentspendingd. An increase in the price of oil and a decrease in G
Assume that a Cob-Dougls production functionis a god representaion of the economy, the substitution efecti stronger than the income efect an tht the economy was intaly at quirum. Suppose that Congress pases alaw that requires al orersto retre at g 72, nstead of 6. Hthe wage is fexble, what il happent uirium outpu? The equilbrium output level wi ncrease OThe euirium outut eve wil derese ( The equilibrium output level will emain constant Not enough information i gven to detemine the answer
Suppose Congress decides to reduce the budget deficit by cutting government spending. a. Use the Keynesian-cross model to illustrate graphically the impact of a reduction ingovernment purchases on the equilibrium level of income. Be sure to label: i) the axes;ii) the curves; iii) the initial equilibrium values; iv) the direction the curve shifts; andv) the terminal equilibrium values. b. Explain what happens to equilibrium income as a result of the cut in governmentspending.
Assume an economy operates in the intermediaterange of its aggregate supply curve. State thedirection of shift for the aggregate demandor aggregate supply curve for each of thefollowing changes in conditions. What is theeffect on the price level? On real GDP? Onemployment?a. The price of crude oil rises significantly.b. Spending on national defense doubles.c. The costs of imported goods increase.d. An improvement in technology raises laborproductivity.
options:a contractionary fiscala contractionary monetarya recessionaryan expansionary fiscalan expansionary monetary an inflationaryequal to greater thangrew inflationless thanrecededthe same asunemployment
L Tllustrate how the following would affect the economy equilibrium output using well labelled Keynesi an cross diagrams. e. Households experience a decline in wealth as the value of housing drops when the housing bubble bursts. f. The nation's leaders tell consumers it is their patriotic duty to save the economy by consuming more, and consumers obey.
Comparing ModelsWhat are the differences between our Keynesian Cross and the Macro Equilibrium (AS and AD) diagram? Which model has more to offer?
When the economy is experiencing a recession, why would aneoclassical e conomist be unlikely toargue for aggressive policy to stimulate aggregate demandand return the economy to full employment? Explain your answer.