In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Assume that the United States economy is currently in long-run equilibrium. a. Draw a correctly labeled graph of aggregate demand and aggregate supply and show each of the following. i. The long-run aggregate supply curve ii. The current equilibrium output and price levels, labeled as YE and PLE, respectively b. Assume that the government increases spending on national defense without raising taxes. i. On your graph in part (a), show how the government action affects aggregate demand. ii. How will this government action affect the unemployment rate in the short run? Explain. c. Assume that the economy adjusts to a new long-run equilibrium after the increase in government spending. i. How will the short-run aggregate supply curve in the new long-run equilibrium compare with that in the initial long-run equilibrium in part (a)? Explain. ii. On your graph in part (a), label the new long-run equilibrium price level as PL2. d. In order to finance the increase in government spending on national defense from part (b), the government borrows funds from the public. Using a correctly labeled graph of the loanable funds market, show the effect of the government's borrowing on the real interest rate.
In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Assume that the United States economy is currently in long-run equilibrium. a. Draw a correctly labeled graph of aggregate demand and aggregate supply and show each of the following. i. The long-run aggregate supply curve ii. The current equilibrium output and price levels, labeled as YE and PLE, respectively b. Assume that the government increases spending on national defense without raising taxes. i. On your graph in part (a), show how the government action affects aggregate demand. ii. How will this government action affect the unemployment rate in the short run? Explain. c. Assume that the economy adjusts to a new long-run equilibrium after the increase in government spending. i. How will the short-run aggregate supply curve in the new long-run equilibrium compare with that in the initial long-run equilibrium in part (a)? Explain. ii. On your graph in part (a), label the new long-run equilibrium price level as PL2. d. In order to finance the increase in government spending on national defense from part (b), the government borrows funds from the public. Using a correctly labeled graph of the loanable funds market, show the effect of the government's borrowing on the real interest rate.
Chapter8: Macroeconomic Equilibrium: Aggregate Demand And Supply
Section: Chapter Questions
Problem 16E
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Transcribed Image Text:In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled
diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes.
Assume that the United States economy is currently in long-run equilibrium.
a. Draw a correctly labeled graph of aggregate demand and aggregate supply and show each of the following.
i. The long-run aggregate supply curve
ii. The current equilibrium output and price levels, labeled as YE and PLE, respectively
b. Assume that the government increases spending on national defense without raising taxes.
i. On your graph in part (a), show how the government action affects aggregate demand.
ii. How will this government action affect the unemployment rate in the short run? Explain.
c. Assume that the economy adjusts to a new long-run equilibrium after the increase in government spending.
i. How will the short-run aggregate supply curve in the new long-run equilibrium compare with that in the initial long-run equilibrium in part (a) ? Explain.
ii. On your graph in part (a), label the new long-run equilibrium price level as PL2.
d. In order to finance the increase in government spending on national defense from part (b), the government borrows funds from the public. Using a correctly labeled graph of
the loanable funds market, show the effect of the government's borrowing on the real interest rate.
Transcribed Image Text:ii. The current equilibrium output and price levels, labeled as YE and PLE, respectively
b. Assume that the government increases spending on national defense without raising taxes.
i. On your graph in part (a), show how the government action affects aggregate demand.
ii. How will this government action affect the unemployment rate in the short run? Explain.
c. Assume that the economy adjusts to a new long-run equilibrium after the increase in government spending.
i. How will the short-run aggregate supply curve in the new long-run equilibrium compare with that in the initial long-run equilibrium in part (a) ? Explain.
ii. On your graph in part (a), label the new long-run equilibrium price level as PL2.
d. In order to finance the increase in government spending on national defense from part (b), the government borrows funds from the public. Using a correctly labeled graph of
the loanable funds market, show the effect of the government's borrowing on the real interest rate.
e. Given the change in the real interest rate in part (d), what is the impact on each of the following?
i. Investment
ii. Economic growth rate. Explain.
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Step 1: Define long-run equilibrium
VIEWStep 2: Draw graph and analyze the effect of increase in government spending
VIEWStep 3: Show effect of increase in government spending
VIEWStep 4: Show the adjustment to long-run equilibrium
VIEWStep 5: Draw graph of loanable funds market
VIEWStep 6: Determine impact of change in interest rate
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