2) 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 showeach of the following.i. The long-run aggregate supply curveii. The current equilibrium output and price levels, labeled as YE and PLE.b) Assume that the government increases spending on national defense without raisingtaxes.i. On your graph in part (a), show how the government action affects aggregatedemand.ii. How will this government action affect the unemployment rate in the shortrun? Explain.c) Assume that the economy adjusts to a new long-run equilibrium after the increase ingovernment spending.i. How will the short-run aggregate supply curve in the long-run equilibriumcompare 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 asPL2.

Economy is already at full employment level . Under this situation where natural rate of…

Answered: O Assume that the United States economy…

Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter33: Aggregate Demand And Aggregate Supply

Section: Chapter Questions

Problem 5PA

See similar textbooks

Related questions

Question

2) 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.
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 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.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 2 steps with 1 images

SEE SOLUTION Check out a sample Q&A here

Follow-up Questions

Read through expert solutions to related follow-up questions below.

Follow-up Question

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?

1. Investment
2. Economic growth rate. Explain.

Solution

by Bartleby Expert

SEE SOLUTION

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions