Use the answer provided to answer the remaining questions Crads. Juppose Swit. erland is initiallynomy. Analyzepandemic in the AA-DD diagram. We refer to this equilibriumIConsiderA-DL uiagram wat full employment (Y = Ythe effects of the Covid1 19 pandemic hitspoint as C.Why did aggregate demand fall? List three reasons.For now, assume thataggregate demand fell due to a decrease in the consumption multiplier c < c, where c isthe previous level of the consumption multiplier. Imagine the government tries to stimulateaggregate demand through a tax cut (i.e., lower T). Is the increase in aggregate demandhigher with the pandemic consumption multiplier cº or the normal consumption multiplier? Do households save a larger or smaller fraction of their income with the consumptionmultiplier cC compared to a situation with a consumption multiplier cf?The Covid-19 pandemic did not only have effects on demand, but also on sup-ply. In particular, many countries are experiencing surges of inflation, whereas inflationin Switzerland remains relatively low. Consider the AA-DD model and start again fromfull employment. Analyze the effects from an increase in the foreign price level P*. Forsimplicity, assume that the domestic price level P remained constant. The economy is initially at full employment at Y*when the Covid 19 pandemic comes, thegovernment impose lockdown in the countrydue to which there is a fall in the AD in theeconomy as the people become very uncertainabout the future. So, the AD’ curve shifts to ADwhere the price level and output both falls. It isshown below:LRASSRASP'E'PAD'ADYfOutputIn the diagram, the economy was in equilibriumat Y' which is at natural level after Covid-19.When the Covid 19 hits the economy, theequilibrium shifts to E which below natural ratePrice level

Aggregate demand aggregate supply model depicts the equilibrium in economy which shows the aggregate…

m Crass. Juppose Swit. erland is initially nomy. Analyze the effects of the Covid pandemic in the AA-DD diagram. we refer to tis equilibrium EJConsider A-DL uiagram at full employment (Y = Y 19 pandemic hits point as C. Why did aggregate demand fall? List three reasons. For now, assume that aggregate demand fell due to a decrease in the consumption multiplier c < c, where cf is the previous level of the consumption multiplier. Imagine the government tries to stimulate aggregate demand through a tax cut (i.e., lower T). Is the increase in aggregate demand higher with the pandemic consumption multiplier c° or the normal consumption multiplier ? Do households save a larger or smaller fraction of their income with the consumption multiplier c compared to a situation with a consumption multiplier cf?

m Crass. Juppose Swit. erland is initially nomy. Analyze the effects of the Covid pandemic in the AA-DD diagram. we refer to tis equilibrium EJConsider A-DL uiagram at full employment (Y = Y 19 pandemic hits point as C. Why did aggregate demand fall? List three reasons. For now, assume that aggregate demand fell due to a decrease in the consumption multiplier c < c, where cf is the previous level of the consumption multiplier. Imagine the government tries to stimulate aggregate demand through a tax cut (i.e., lower T). Is the increase in aggregate demand higher with the pandemic consumption multiplier c° or the normal consumption multiplier ? Do households save a larger or smaller fraction of their income with the consumption multiplier c compared to a situation with a consumption multiplier cf?

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section: Chapter Questions

Problem 2TY

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The short run aggregate supply curve was constructed assuming that as the price of outputs increases, the puce of inputs stays the same. How would an increase in the prices of important inputs, like energy, affect aggregate supply?
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Congratulationst You have been appointed an economic policy adviser to the United States, You are told that the economy is significantly abowe futtemplyoment GDP. Based on this inlormation, how can the economy would adjust to reach LR.SR Equilbrium (Classical View)? The economy wilt experience low unemployment rate, pushing wages up, and increasing the pelces of a key input (labor). shatting the sAS to the left (up). The economy will experience high unemployment rate, pushing wages down, and reducing the prices of a key input (labor). shiting the SAS to the right (down). The econoriny wil experience low unemployment rate, decreasing inceme, which will eventually shift the AD to the left. The eooncmy will experience low unemployment rate, pushing wages up, and increasing the prices of a key input (labor), shiting the sAs to the night (down).
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Illustrate and interpretthe short-run andlong-run aggregatesupply curves
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in a closed economy with no government, where aggregate demand is determinedby autonomous consumption, investment (which is independent of output), and themarginal propensity to consume.a) Given that autonomous consumption is 20, investment is also 20, and the marginalpropensity to consume is 0.6, write out an equation for aggregate demand (AD) in thiseconomy. b) Given this aggregate demand equation, and the equilibrium equation Y = AD, usealgebra to find the equilibrium level of Y. c) Draw a diagram with output (Y) on the x-axis and aggregate demand (AD) on the yaxis. Draw two lines on this diagram: (i) Y = AD, and (ii) the aggregate demandfunction from part (a). Label the intercept of the AD line, and the point where the twolines intersect, with numerical values. (3 marks)d) Suppose that the marginal propensity to consume falls from 0.6 to 0.5. What wouldthe new equilibrium level of Y be? Illustrate your answer in the diagram you drew forpart (c). (2 marks)e) Calculate the value of…