A number of countries, like Greece and the United Kingdom, have in the past few years responded to growing and problematic levels of debt by introducing “austerity” policies: significant cuts to government purchases (G) combined with significant tax (T) increases. These policies have been controversial among both economists and the public. (a) Using the AS/AD model, what is the short-run effect of the austerity policy on prices and output? (b) What is the short-run effect of the austerity policy on the unemployment rate? (c) Using the AS/AD, what is the long-run effect of austerity on prices and output? (d) What is the long run effect of austerity on the unemployment rate?

A number of countries, like Greece and the United Kingdom, have in the past few years responded to growing and problematic levels of debt by introducing “austerity” policies: significant cuts to government purchases (G) combined with significant tax (T) increases. These policies have been controversial among both economists and the public. (a) Using the AS/AD model, what is the short-run effect of the austerity policy on prices and output? (b) What is the short-run effect of the austerity policy on the unemployment rate? (c) Using the AS/AD, what is the long-run effect of austerity on prices and output? (d) What is the long run effect of austerity on the unemployment rate?

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter15: Macroeconomic Viewpoints: New Keynesian, Monetarist, And New Classical

Section: Chapter Questions

Problem 15E

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