From the following graph, identify the initial equilibrium, the short-run equilibrium, and the long-run equilibrium based on the scenarios below. Explain your answers and identify what happened to the price level and aggregate output. Scenario 4. The economy is initially in long-run equilibrium at point C, and energy prices decrease significantly. The government reacts by implementing a contractionary fiscal policy. JAS (Long run) AS, (Short run) |AS; (Short run) B AD AD2 Yo Y2 Aggregate output (income), Y Price kevel, P

From the following graph, identify the initial equilibrium, the short-run equilibrium, and the long-run equilibrium based on the scenarios below. Explain your answers and identify what happened to the price level and aggregate output. Scenario 4. The economy is initially in long-run equilibrium at point C, and energy prices decrease significantly. The government reacts by implementing a contractionary fiscal policy. JAS (Long run) AS, (Short run) |AS; (Short run) B AD AD2 Yo Y2 Aggregate output (income), Y Price kevel, P

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter16: Expectations Theory And The Economy

Section: Chapter Questions

Problem 10QP

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Construct an Aggregate Supply and Aggregate Demand model where AS and AD are in equilibrium at potential GDP at a price level of 110 and Real GDP of $13.0 trillion dollars. Be sure to label all parts of the graph. a. Graph the initial effects of a recession that causes AD to decrease and real GDP to fall $0.5 trillion. b. Explain what will happen in the long run if nothing is done. c. If the government wanted to intervene in the economy, explain the Fiscal Policy measures that can be used to bring real GDP back to potential.
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Which of the following statements about Fiscal Policy is INCORRECT?(a) In order to combat inflation, the South African Reserve Bank must apply acontractionary fiscal policy;(b) A contractionary fiscal policy can result in higher levels of unemployment; (c) Expansionary fiscal policy will increase the budget deficit; (d) The application of fiscal policy will have no effect on aggregate supply in the AD‐AS model.