Draw a correctly labeled AD/AS graph and a correctly labeled Phillips curve graph showing an economy with a recessionary gap. Label the initial equilibrium on both graphs point “A’. (i) Suppose that policymakers increase government spending resulting in full employment. Show the result of this fiscal policy action on both graphs. Label this new equilibrium point “B”. Identify what happens to inflation and unemployment in the short-run. (ii) Suppose that policymakers now cut consumer taxes resulting in a positive output gap. Show the result of this fiscal policy action on both groups. Label the new equilibrium point “C”. Identify what happens to employment in the short-run. (iii) At point “C”, what will happen to wages and resource prices in the long-run? Explain.
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1. Draw a correctly labeled AD/AS graph and a correctly labeled
(i) Suppose that policymakers increase government spending resulting in full employment. Show the result of this fiscal policy action on both graphs. Label this new equilibrium point “B”. Identify what happens to inflation and
(ii) Suppose that policymakers now cut consumer taxes resulting in a positive output gap. Show the result of this fiscal policy action on both groups. Label the new equilibrium point “C”. Identify what happens to employment in the short-run.
(iii) At point “C”, what will happen to wages and resource prices in the long-run? Explain.
(iv) Given your answer to question #3, show how both models adjust in the long-run and label the final equilibrium point “D”. Identify what will happen to inflation and unemployment at point “D” compared to when the economy was at point “C”.
(v) Identify what happened to real output at point “D” compared to when the economy was at point “B”. Explain.
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