What will happen over time in this economy if it is left to itself with no intervention from economic policy?

We want to study what happens to GDP and prices as an economy is hit by a shock. For each question Show more We want to study what happens to GDP and prices as an economy is hit by a shock. For each question mark clearly the axis the curves and the equilibria. Draw the aggregate demand curve and the short and long run supply curves for a country in one diagram. Assume that the country starts out in long-run equilibrium. The economy is hit by a negative demand shock. Illustrate the shift(s) in your diagram. Mark clearly the price level and output in the new equilibrium as P2 Y2. What could have caused the negative demand shock? List at least 2 events. What will happen over time in this economy if it is left to itself with no intervention from economic policy? Illustrate how curve(s) will shift and explain briefly why. (Max 2 sentences). Mark clearly the new long-run equilibrium levels of output as Y3 and the price level P3. Assume instead that the government decides to use active fiscal policy to revert the economy to long-run equilibrium because they are concerned about the situation. Why may the government be concerned? Explain briefly. Assume that the government decides to increase spending by $120 mill. The government estimated that MPC = 0.65. Which curve will shift and by how much? Illustrate the shift in your graph. Assume that the government decides to use transfers for fiscal policy instead. Do they need to increase or cut transfers to get the same effect as above? If transfers change by $120 mill. will the effect on GDP be the same as if government spending increases by $120 mill.? Explain briefly. Do you think all economists will agree on the need for fiscal policy in the situation above? Explain briefly. Some think that it would be good to have an active fiscal policy but the practical problems involved are too big like time lags for implementing policy. Explain briefly what the time lags problem is. Show less

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