Beginning in March 2013, federal government spending was resstrained due to the sequester (feel free to Google details). Moreover, then President Obama’s budget proposals called for cuts in various types of government spending over the next ten years. Use the AD-AS model (along with a labor market graph) to show and explain how this will affect Y, N, W/P, and P over time.  As an aside, recent news reports have suggested that the possibility of a renewed use of the sequester is part of the current political maneuvering over the federal budget for the fiscal year that starts October 1st.

Question
Asked May 6, 2019

Beginning in March 2013, federal government spending was resstrained due to the sequester (feel free to Google details). Moreover, then President Obama’s budget proposals called for cuts in various types of government spending over the next ten years. Use the AD-AS model (along with a labor market graph) to show and explain how this will affect Y, N, W/P, and P over time.  As an aside, recent news reports have suggested that the possibility of a renewed use of the sequester is part of the current political maneuvering over the federal budget for the fiscal year that starts October 1st.

 

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Step 1

Federal spending: It is the spending by government and a part of aggregate demand.

Aggregate Demand (AD): Aggregate demand is the sum of all demands for all goods and services by all economic units in an economy.

Aggregate Supply (AS): Aggregate supply is the total supply of all goods and services by all production units in the economy.

Step 2

Given below is the AD-AS model depicting the determination of equilibrium price (P), output (Y), real wages (W/P) and employment (N) in the economy.

AD: Aggregate Demand

AS: Aggregate Supply

Y*: Equilibrium Output

N*: Equ...

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